As the price of oil drops from its all time high of $147 per barrel, OPEC is taking steps to cut production to keep the price of oil above $100.  It acted yesterday to reduce its overall output by 500,000 barrels.  Though 500,000 barrels doesn’t seem like much, the margin between the amount of oil produced and oil consumed is only around 1-2 million barrels per day.  A daily cut of 500,000 barrels will prop up the oil markets even as China and India slow down.

OPECs price targets slowly get higher as the price for oil reaches the levels they wish to see.  Used to be that a $60 price target was high enough, then $80 and now the OPEC alliance is searching to keep the price of oil at $100 per barrel.  No one can blame them, they have the power to manipulate supply to level s that are obscenely profitable.  OPEC does have a delicate balance to maintain, if they allow oil to reach levels that is too high for the current market, they face the problem of being ousted by alternative energy possibilities that will put a damper on oil purchases and eventually consumption.

The job of OPEC is to move oil policy through the members it represents.  Many countries are happy to each produce lesser amounts of oil if it means higher prices.  Cutting back on oil production will inevitably bring higher prices, but possibly a reduction in oil revenue.  If oil cuts grow too big, the problem is that oil revenue would drop even as OPEC receives more per barrel.  Many of the countries represented by their oil reserves have little income source other than oil production. Without ever increasing oil revenues, these nations would be broke, bankrupted by debts and other expenses and no income source to offset expenditures.

Saudi Arabia and the UAE are a couple of the OPEC nations that have taken their oil revenues to invest in other interest.  Saudi Arabia and the UAE have made huge investments in their resorts and made their nations a destination spot for the world’s travelers.  This is one way to invest the proceeds in a way that helps their local economy and moves their income from a commodity based economy to something more service oriented.  While oil may not be here 40 years from now, the business of luxury and overindulgence in the service sector will still be around.