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Depleted oil stocks set to keep prices high

By TIM COLEBATCH Monday 3 April 2000

Oil prices have fallen by more than $A10 a barrel. OPEC members have agreed to lift their collective output quota by at least 1.45 million barrels a day, while non-OPEC exporters have pledged at least one million more.

Yet oil industry analysts warn that the price we pay at the petrol pumps could still climb to more than $1 a litre. How come?

At first sight, the decisions announced by OPEC and the other oil exporters last week appear to send clear signals of lower prices ahead. OPEC's members pledged to increase their official quota by the equivalent of 7 per cent. Iran, while refusing to sign, said it would do the same. Norway and Mexico announced an extra 250,000 barrels a day between them. And Iraq promised to release an extra 700,000 barrels a day after the lifting of some of the more egregious United Nations sanctions on it.

In theory, this should mean between 2.5 million and three million barrels a day extra to relieve the world's thirst for oil.

In theory, this should reduce the prices paid at the petrol pump, as it has already cut the spot price for crude oil from a high of $US34.37 ($A56.57) three weeks ago to $US26.98 ($A44.41) on Friday.

In reality, analysts warn, the immediate future for oil prices is murkier. Three reasons stand out:

1.OPEC members were already cribbing on their quotas, and actually producing about 1.25 million barrels a day more than they had pledged. If the new quotas simply make this unofficial output official, the difference to world oil supply will be negligible. More likely, OPEC members will continue pushing up production above the new quotas, but it may be some time before it is clear by how much.

2.The oil pipeline needs to be replenished before it can deliver lower prices to the petrol pump. Until now, oil companies have shielded consumers from the full impact of rises in spot oil prices by running down their oil stocks. In effect, petrol prices have been kept below $1 a litre by the companies selling more oil than they produce - a trend that is unsustainable over anything more than a few months.

In the West, oil stocks are now at their lowest levels since the Gulf War. Even if inventories remain at that level for the near future, much of the increases announced last week will be absorbed simply in preventing any further rundown of stocks. Analysts believe world oil prices are set to remain around current levels for some time yet.

3.Even assuming the Federal Government finds a formula to prevent the GST pushing up oil prices in country regions, indexation of the petrol excise means the overall impact of the GST on inflation will flow into higher oil taxes next year, raising prices by up to 5 per cent.

Depleted oil stocks set to keep prices high

-- Ain't Gonna Happen (Not Here, April 03, 2000

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