The odd thing, to me, is that this cut is being widely reported in the media, yet there is no discussion about whether or not Bush is leaning on KSA to keep the taps open and let the price drop back to "normal" levels (~$40/bbl).

http://www.theoildrum.com/story/2006/1/2/19364/13876

It's about the Hotelling model of oil production (which has nothing to do with hotels and everything to do with Dr. Hotelling who invented it).

Basically Hotelling asked, how should owners and producers of oil or some other finite resource manage their production in order to maximize their profits? There's some advantage to producing quickly in order to get money up front, since money sooner is worth more than money later. On the other hand there's some advantage to waiting longer, when the resource will be in short supply and be worth more. Hotelling analyzed how to optimally balance these two effects and computed what the ideal production profile would be.

It turns out that in theory, producers should schedule production so that the price rises steadily and consistently over time. This means producing at the maximum rate at first and then gradually ramping down production (not for geographic reasons, but for economic ones). At some point the resource is assumed to get so expensive that some other resource would be substituted, and the whole thing should be arranged so that we run out of the resource just as the price rises to that point.

Ignoring the somewhat awkward fact that the history of oil production does not resemble the Hotelling model in the slightest, we might nevertheless expect that such considerations start to play a role as we move into the oil endgame. Now that oil producers see that their resource is in fact finite and will run out in the foreseeable future, they need to maximize the net wealth they can extract during the time they have remaining. And Hotelling tells them exactly what to do: adjust production so that the price rises at a few percent a year (in real terms, i.e. plus the rate of inflation - a net price increase of maybe 5-8% per year).

Short-term Peak Oil believers might argue that if this is in fact what producers wish to do, they've waited too long: they will not be able to produce at a rate that can limit price increases to this modest amount. Natural growth in demand will cause the price to increase much faster than this, and geographical limitations will prevent production from keeping up to restrain price increases.

However, Hotelling has an answer to this, which is that if a producer anticipates these events, he needs to change his strategy. Specifically, the producer needs to throttle back right now, which will cause a one-time price increase, such that he will from then on be able to supply sufficient additional oil that this much-higher price can grow at that gradual rate.

I could go into more detail about what the profit-maximizing oil producer should do who knows when he and the world will peak (this would particularly apply to Saudi Arabia), but this is getting a bit long. Suffice it to say that SA's actions are not particularly consistent with the view that they are trying to maximize their wealth and that they know that the peak is now or very near.