OPEC Ministers Decide Against Winter Oil Production Increase

By William Drozdiak Washington Post Foreign Service Monday , November 13, 2000 ; Page A19

VIENNA, Nov. 12 BB The Organization of Petroleum Exporting Countries spurned appeals today from industrial countries seeking relief from high prices and ruled out any further increases in crude oil production through the end of the year.

With heating fuel stocks at record lows and cold weather expected to strike many parts of the United States and Europe this week, the decision by OPEC oil ministers appeared to dash hopes for a rapid decline in oil prices, which now hover just above $34 a barrel.

Saudi Oil Minister Ali Nuaimi said that following four successive hikes in production this year, OPEC wanted to see how the market responds as cold weather arrives in the Northern Hemisphere. "It takes time to assess what has been done," he told reporters. "There is no need to do anything now. We are just monitoring the situation and will make decisions when necessary."

Many OPEC countries fear that the recent production increases could lead to an oversupply that could drive prices back down to $10 a barrel. Even though prices remain well above the group's preferred range of $22 to $28 a barrel, there are growing worries about a price collapse when winter draws to a close.

"I believe the oil is already in the market," Nuaimi said. "It took us 18 months to recover from the [last] price collapse. We've had less than a year of output increases. So let's allow the market to absorb the oil."

Several countries said that when OPEC ministers meet again on Jan. 17 they are likely to shift their focus to production cuts to shore up prices once demand for heating oil starts to wane. Iran and Algeria, regarded as the leading price hawks in the cartel, have already declared that they will push for a slash in output to prevent a downward price spiral next spring.

The mood of uncertainty that surrounded today's gathering reflected OPEC's persistent troubles in calibrating global supply and demand. Although the cartel controls 40 percent of the world's oil production and 60 percent of all exports, it must cope with an important number of producing countries not subject to its decisions, including Russia, Mexico and Norway.

And even though Iraq is an OPEC member, it is not part of the cartel's quota system because its oil production--estimated at 2.3 million barrels a day--operates under a U.N.-supervised program under which Baghdad is allowed to sell enough oil to pay for the country's food and medical needs.

OPEC also has complained that its efforts to stabilize world oil prices have been undercut by factors beyond its control. These include shipping bottlenecks, the record low stocks held by U.S. refiners who transform crude oil into gasoline and heating oil, and the high fuel taxes imposed by European countries that often account for up to 80 percent of the price paid by household consumers.

A price-trigger mechanism adopted by OPEC this year has failed miserably. The system, proposed by Saudi Arabia, was supposed to enable the cartel to react quickly to market volatility by triggering either an automatic increase in production quotas if oil prices exceed $28 a barrel for 20 consecutive days or an automatic cut if prices dropped below $22 a barrel for the same duration.

The latest production increase of 500,000 barrels a day, which was announced two weeks ago, actually led to higher prices in the days following the decision. With all OPEC members except Saudi Arabia pumping at maximum capacity--and churning out more oil than at any time in the past 20 years--many members now want to jettison a mechanism that does not seem to affect the market and only inflicts further damage to the cartel's credibility.

Despite raising oil production by 3.7 million barrels a day, or 16 percent, OPEC members have become increasingly defensive about their failure to bring prices back to the mid-$20 range that most consumers and producers agree would be optimal for a healthy global economy.

"The problem with the world energy situation is not crude oil supplies, but rather the lack of heating fuel and refining capacity in the United States," said Venezuelan Oil Minister Ali Rodriguez, who was chosen today to become OPEC's next secretary general. "We have raised output four times already this year, and we see no reason at this time for any more."

The International Energy Agency warned last week that low inventories of heating oil in the United States and Europe raised serious risks of shortages this winter that could drive up prices dramatically. Even when the refining and shipping blockages ease, it is unclear whether the extra OPEC crude supplies will reach refiners in time to keep prices down.

But once winter is over, and if economic activity in the United States and Europe slackens as predicted by many analysts, the world could find itself with a crude oil glut that could send prices plummeting. That prospect frightens many OPEC members and makes them particularly cautious about doing anything more to depress prices.

B) 2000 The Washington Post

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-- Martin Thompson (mthom1927@aol.com), November 13, 2000