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.

So if one month they can pump and store and the next month the both pump and empty storage they "boost" production the second month.

This means they are pumping flat out all the time but doing production cuts as needed to refill storage.

Anecdotal evidence suggests that they are indeed pumping flat out regardless of the announced cuts and using cuts as a cover to refill storage tanks. Or at least till recently it looked suspiciously like this was the case. Now they probably need to simply start cutting production or risk damaging the fields. At say a fake cut of 500,000 mpb with 300,000 mbd still being pumped they can refill storage fairly quickly.

Notice the noble GWB is playing fast and loose with the SPR.
And as far as I know draws on the SPR do not have to be public especially lets say if they are for military use.
So even here their exists the chance that not only is Bush not refilling the SPR but that he has authorized semi-secret transfers for military use. I don't know if the military ever purchases crude directly but if it does then injection of crude from the SPR for military use is quite possible and of course need not be made public. Considering how big a user of oil the military is it would boost supplies considerably.

Here is one link of a company that sells to the military.

http://www.hollycorp.com/refineries_navajo.cfm

I'm just throwing that out as a type of game you can play with monthly production if you have a large tank farms.
It can hide real shortfalls for some time. Sooner or later
real declines will force the numbers down but you may be able to hide them for 6 months or more by playing games storage and it gives you plenty of time to think of a reason for the next "production cut".

The question is how much influence do these types of scenarios have on world supply ?

Remember the claim is 500,000mbd of oversupply was all that is needed to drop oil prices significantly.

A combination of a cooling US Housing market plus stopping the refilling of the SPR  and the buildup for hurricane season might be the only reason for the current oversupply.  If not additional games with tank farms may be all that's needed to ensure a short term oversupply situation. If we really are playing games with our internal production and the SPR and it ever comes to light then you know KSA is doing it.

If this is really happening expect production numbers to drop of quite a bit say next fall at the latest.

With these stresses, the US may end up like Russia or Argentina after their crashes. If this happens, oil usage will be immediately reduced, but it is not clear any real progress will be made in finding alternatives. Also, we are likely to have problems with many of the basics - food, maintining basic services, law and order, and the like.