As Prices Rise, Nations Ask for More Oil

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September 8, 2000

As Prices Rise, Nations Ask for More Oil By NEELA BANERJEE s OPEC prepares to meet this weekend in Vienna, it finds itself on familiar ground, with oil prices hovering at worrying heights and nervous industrialized nations demanding more oil, fearful of an end to good economic times.

A little more than two months ago, the Organization of Petroleum Exporting Countries convened under similar circumstances and responded by increasing production by 708,000 barrels a day. In fact, since the beginning of the year, OPEC has raised production by nearly three million barrels a day, a significant amount over a short period.

Yet the price of crude oil, despite occasional dips, has stayed stubbornly high. Yesterday in New York, the price of oil rose as high as $35.46 a barrel, the highest price since the Persian Gulf war, before slipping back to $35.39, a gain of 49 cents, or 1.4 percent.

At a United Nations summit meeting in New York yesterday, President Clinton said the price of oil was too steep and encouraged OPEC to raise output. On Wednesday, Bill Richardson, the energy secretary, said that energy costs were "unacceptably high" and that oil-producing nations should increase production enough to reduce prices to $20 to $25 a barrel.

Facing such pressures, OPEC is expected to open the taps once again when its session concludes on Sunday or Monday.

But the price of oil will most likely remain high, with few analysts expecting it to fall far below $30 a barrel in the coming months.

"If there is a cooling-off, prices will go from $34 a barrel to maybe $31, not $25," said Roger Diwan, managing director of the Petroleum Finance Company, a consulting group in Washington. "The problem is not, are prices going to stay high, but more, are they going to go up? How will OPEC avoid a flare-up to $40 a barrel?"

Concerned about the political fallout from high heating oil prices in an election year, the Clinton administration has increased pressure on Saudi Arabia, the de facto leader of the cartel, to coax a large production increase from OPEC. But the cartel is already exceeding its official quota by about 670,000 barrels a day, industry experts estimate. An increase of 700,000 barrels a day would preserve the status quo, making the "cheating" official. Oil traders say that an increase of at least 800,000 barrels would keep prices stable, and one million barrels a day would dampen them a bit.

But the persistence of high prices has as much to do with conditions within the countries that import oil as it does with OPEC's tinkering on the supply side. The increased OPEC supply has been quickly consumed by thriving economies that demand greater amounts of fuel to keep goods and people moving.

In the United States, the anxiety that has buoyed oil prices has less to do with OPEC and more to do with federal statistics that show supplies of heating oil, especially in the Northeast, are far lower than last year.

"Since gasoline inventories were low going into the summer driving season, refiners concentrated their efforts on producing gasoline, which meant they have not been able to rebuild distillate stocks ahead of the winter heating season," said Vincent Lauerman, senior economist with the Canadian Energy Research Institute in Calgary, Alberta. "We were playing catch-up with gasoline stocks before and we're playing catch-up with heating oil now."

Moreover, United States refineries are now exporting more heating oil than the country imports, industry experts say. A Kuwaiti refinery that supplies much of the world's heating oil was disabled by an explosion this summer, which drastically cut the amount of heating oil available. In Europe, Mexico and Brazil, tight supplies of heating oil have driven prices higher than they are here, drawing fuel to those regions and out of the United States. The federal government is now looking at ways to curb such exports.

Because of the great lag in stockpiling, few think that even a drastic increase in production by OPEC will allow American refineries to replenish their heating oil reserves by the winter. If the weather turns bitter, the Northeast, which consumes most of the country's heating oil, could face the same price increases as it did last winter.

OPEC members, while publicly agreeing that crude prices are too high, have also said that it was a problem of demand, not supply. The fragmented priorities of the 12 sovereign states within OPEC have made it hard for the cartel to answer the pleas of oil-hungry nations like the United States.

Nearly all the OPEC members are producing at capacity, except for Saudi Arabia. If overall production rose sharply and prices fell, few countries could make up for the loss in revenue by increasing volume. That revenue, in turn, often constitutes up to 75 percent of the budgets of OPEC nations.

"We think there is a good balance at this point between offer and demand," said Hictor Ciavaldini, president of Petrsleos de Venezuela S.A., the state oil company.

With revenue so high, there are also differing views about a fair and favorable price for a barrel of oil. "The reasonable price keeps shifting," said Leonidas E. Drollas, chief economist for the Center for Global Energy Studies, a British research group. "When the price was $10, OPEC said $15 would be reasonable. When it was $17, they said $20. Now some think $30 is reasonable."

The cartel is also afraid of overproducing and touching off a free fall in prices, which occurred two years ago. Cartel members and non-OPEC countries are developing new wells as fast as possible to take advantage of the high oil prices. Over the next year or two, new fields will bring supply closer in line with high worldwide demand and probably lead to a downturn in oil prices, experts said.

"OPEC is terrified that if they push too many barrels out now, in three months they'll be looking at rapidly falling prices," Mr. Drollas said. "And then, it won't be easy to pull things back."

http://www.nytimes.com/2000/09/08/business/08OIL.html



-- Martin Thompson (mthom1927@aol.com), September 08, 2000

Answers

Boy, do I ever get sick of all this hogwash about OPEC increasing production--as if it's as easy for them to do so as turning on a water faucet.

Doesn't work that way. If anybody has noticed: the announced production inceases and announced inventories held in importing countries ARE DRASTICALLY DIFFERENT. Tankers sinking at sea? I don't think so.

Something smells to high heaven here.

-- Jack (jpayne@webtv.com), September 08, 2000.


I am starting to get bleary eyed at all these repetitive 'energy' posts. It is definately not like 1999 when it was almost impossible to find a serious y2k story. I still wonder if the message is getting through to the 'general public'. I doubt it. I have seen no mention of the crisis in Europe on the TV. But then what can you expect in 20 second sound bites.

Beware of stupid people in large numbers.

-- Martin Thompson (mthom1927@aol.com), September 08, 2000.


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