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It was another down week for oil prices. Starting out in the low $40s, oil fell as low as $35 a barrel before jumping to a close at $37.71 after the UAE announced the details of the production cuts it was making to comply with the recent OPEC decision.

Despite widespread skepticism that the cartel will actually cut production on the order of 4 million b/d in the next few months, several OPEC members have already announced the details of how and when they plan to make the required cuts.  Despite an OPEC tradition of ignoring production cuts, this time it may be different. Prices have fallen so far that nearly every member of OPEC is in serious trouble. The realization may be growing that if they don’t hang together and temporarily swallow the reduced revenue from lower exports, it may be a long time before prices rebound.

Billions in oil revenues that were flowing into OPEC coffers as recently as last summer now remain in the pockets of consumers around the world. In the US, the cost of fuel is now down by nearly $2 billion a day which is making a major contribution to cushioning the effects of the recession.

Although a drumbeat of harsh economic news continues to flow from around the world, it is still unclear just how far the worldwide demand for oil has dropped. While US demand is down by about 1.2 million b/d, OECD reserves have been growing, and other major consumers are reporting lower imports, these factors are balanced by much lower oil prices. China is reported to be filling its strategic reserve, the US will resume doing so after the 1st of the year and South Korea will start filling its reserve shortly.

The rapid and unprecedented drop in prices clearly indicates that there is too much oil available for current demand. Whether this surplus is measured in hundreds of thousands of barrels per day as suggested by the IEA, or several millions as suggested by other observers, has yet to be determined.