Oil falls as production is cut

From Investment and Business News

OPEC has agreed to cut oil production by 1.2 million barrels a day, and yet the price of oil still fell. Some say it’s because traders don’t expect OPEC members to adhere to the cut. Equally, however, it could be argued that OPEC reduced oil quotas because it knew the price of oil was going to fall anyway. In the long term, OPEC is not served well by a high oil price: it will encourage the world to look for alternative sources of supply, and alternative forms of energy.

Back in the early ’80s they used to say the demand for oil was actually quite elastic in the long run. What they meant was in the short run it was inelastic, meaning oil producers could charge what they wanted and demand would stay the same, but in the long term, higher price led to lower demand. And it would seem that principle is still true today, and OPEC knows it.