Raising prices by cutting back on global oil production is turning out to be more difficult than many imagined. Gone are the days when even a hint of a production cut would send prices surging, for after decades of experience with OPEC’s “cuts” many have grown skeptical of the cartel’s propensity to talk prices higher without suffering the pain of reduced revenue and lost markets.

This time the process has become even more difficult because an unprecedented drop in oil prices has left many OPEC members unable to pay their obligations and a major economic downturn is cutting the demand for oil at some unknown rate. Cartel members are piqued by major non-OPEC exporters such as Russia, Norway, Canada, and Mexico who are making no efforts to cut production yet will benefit when prices rise again.

It has now been nearly 5 months since OPEC began talking of and announcing production cuts. Given the nature of oil exports, which involve long-term contracts, tanker chartering, loading schedules, and long voyages, cuts may take several months to become effective. In a period when demand apparently continues to drop, this balance is difficult to perceive.

From all reports OPEC members appear to be making actual cuts. The Saudis are again leading the way by saying they will cut 300,000 b/d more in February than called for by their quota and Angola says its exports will be under its target by March. OPEC’s Secretary General claimed last week that there has been nearly 100 percent compliance with the production quotas.

In the last week however, there are indications that some OPEC members are starting to panic. Market observers now are talking of oil prices slipping into the $20s and staying there until a global economic recovery increases demand. Venezuela is reported to be nearly $1 billion behind in the payments it owes oil service companies such as Schlumberger and Halliburton. Even more interesting is the report that Caracas is making discreet inquiries to the hated international oil companies about the possibility of investing in its oil projects again.

Suggestions of an oil embargo to support the Palestinian cause in Gaza were quickly dismissed. The last thing the Arab oil exporters want is an embargo-sized drop in production possibly leading to worldwide economic chaos.

Talk of a fourth production cut at the March OPEC meeting is already coming from Iran, Venezuela, and Algeria and there are occasional suggestions that a special meeting in February might be in order if prices continue to fall. OPEC’s Secretary General said last week that we won’t know the effect of the current production cuts until February 15th.