Oil prices edged higher Tuesday after ministers from the Organization of Petroleum Exporting Countries (OPEC) agreed to reduce output.
OPEC ministers have decided to stop producing more than their quota of 24.5 million barrels per day, effective immediately. The ministers also moved to lower the output quota by one million barrels per day, beginning April 1.
Some of the ministers said the two-step cutback is aimed at keeping oil prices steady while demand for oil is expected to decline as spring comes to the northern hemisphere.
With current demand high, OPEC countries have been exceeding production ceilings by an estimated 1.5 million barrels per day. If the cuts announced Tuesday are implemented, they would amount to a 10 percent reduction in OPEC's oil production.
But economic analyst Jim Steel, who is director of research at Refco Securities in New York, said the decision may not be so easy to implement. "The important statement I think is their attempt to rein in that production, and that, I think, that is going to be very difficult because historically these crude prices are very high and it's very difficult for OPEC to cut when the price incentive to keep producing is so strong with oil in the $30 and above range," he said.
Oil prices have surpassed OPEC's $22 to $28 a barrel price range in recent months, and rose again on Tuesday following the announcement of the production cuts.
Mr. Steel said the elevated price of oil, combined with the decrease in output that OPEC plans for April, may encourage other oil producers to increase their production. "We're going to see slowly increasing output from Iraq, and also we're going to see increased output from other non-OPEC countries, particularly in the Caspian. Russia is going to continue to produce, because these prices are very, very high and that's what OPEC have to realize is the incentive to produce outside of OPEC because of these high prices is enormous," he said.
In Washington, a White House spokesman responded to OPEC's decision on Tuesday, saying President Bush hopes the cartel does not take any action that would hurt the U.S. economy.