Crude prices tumble despite record OPEC production cuts

ORAN, Algeria -- Here's how bad things are for OPEC these days: It announced its largest-ever production cut Wednesday and oil prices promptly slumped to $40 a barrel, the lowest level in more than four years.

Ministers of the 13-nation oil cartel were trying to shock markets by slashing output 2.2 million barrels a day, more than double two recent production cuts. "I hope we surprised you," said OPEC president Chakib Khelil when asked whether the move would send prices upward.

Instead, the markets fell again. Although declining gasoline prices have begun to edge up after falling from an average of $4.11 a gallon in July to a low of $1.65 on Friday, analysts believe oil's decline could send them even lower.

Benchmark crude prices tumbled to $39.88 per barrel Wednesday, levels not seen since July 2004 on the New York Mercantile Exchange. In just five months, crude has given up all the price gains made over the past four years amid an oil glut and the spreading recession.

Gasoline prices have been plunging right behind crude, providing a bit of economic cover for almost everyone. Yet crude has fallen so far, so fast, there is growing concern that consumers are being set up for a price shock.

OPEC's latest cut is likely to curtail, at least somewhat, the ongoing decline in gasoline and heating oil prices, said Peter Beutel, an oil analyst at Cameron Hanover.

What OPEC is trying to do, Beutel said, is "slowly dry up a pool of available crude oil and, ultimately, it will mean higher prices."

By Memorial Day, he said, gasoline could be anywhere from 50 cents to $1 a gallon higher than current levels.

OPEC was unable to tamp down soaring oil prices over the summer, which hit a record near $150 a barrel in July, and it has been unable to stop crude on the way down. The problem confronting OPEC is that demand rather than supply has been ruling the market.

The price of oil is closely tied with the buying habits of Americans, which are now hunkering down for the worst recession in at least a generation.

Consumers had been changing their traveling habits in the wake of higher fuel prices and environmental concerns. The government reported last week that between November 2007 and October, Americans drove 100 billion fewer miles.

Whether OPEC will be effective in limiting supply, remains to be seen. The cartel has had difficulty in the past addressing overproduction, with members regularly ignoring quotas. That makes investors skeptical about any pledge by the group to honor their commitments.

Khelil, asked whether the latest cut would be enacted, said: "I can tell you it's going to be implemented and implemented very well, because we don't have any other choice."

If past and present commitments are honored by the 11 members under production quotas, OPEC, which produces around 40 percent of the world's oil, would sell less than 25 million barrels a day.

But the cuts are failing to catch up to market realities. Earlier this week, OPEC cut its own demand forecast by about a million barrels a day.

OPEC warned falling prices could jeopardize crude supply as investments are reined in.

There were hopes that Russia would ally itself closer with OPEC, but its announcement that it would cut production appears largely symbolic.

Russian Deputy Premier Igor Sechin and Azeri Energy Minister Natik Aliev announced cutbacks of a total of more than 600,000 barrels a day.

But with Russian production falling, due in part to lagging investment, it was unclear whether some of the cuts enacted or proposed were simply a way of packaging Moscow's inability to keep up present output levels.

A member of the Russian delegation, who asked for anonymity because he was not authorized to comment publicly, said joining OPEC was not in his country's best interest.

Russian membership in OPEC would give the organization more leverage, with control of 50 percent of the world's crude.

Still, individual producers are already pulling crude off the market. There is oil being stored in supertankers at sea to avoid bringing it to market.

"You've got a commodity that people are buying less of because they can't afford to buy more," said Phil Flynn, an analyst at Alaron Trading Corp. "People are fearful. They have a lack of confidence in the economy. They're closing their factories."

As dire as the current economic atmosphere is, the global economy will rebound eventually and supply problems remain the same: oil is getting harder to find every year.

It is not a matter of if oil prices will rocket again, it is a matter of when.

"The guy on the street should not be seduced by what is happening right now and should be thinking about putting money away for a rainy day," said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service. "When this economy rebounds, everyone is going to be talking about the mythical 'they,' ... the ones responsible for uncomfortably high energy prices."

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Associated Press writers Angela Charlton, Alfred de Montesquiou and Adam Schreck in Oran contributed to this report.