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September 30, 2001

Oil, Politics and the New Global Fault Lines By NEELA BANERJEE

THE Associated Press

VIENNA -- Despite the fresh wounds in America and the nagging memory of a terrorist assault against them in 1975, OPEC ministers put on tight smiles last week and seemingly went about business as usual as they gathered for a quarterly meeting here.

Like clockwork, the Saudi oil minister, Ali al-Naimi, stepped out of his hotel at 7 each morning for a brisk walk, accompanied by an aide and an Austrian bodyguard whose only visible weapon was his towering bulk.

In the afternoons, all the oil ministers from the Organization of Petroleum Exporting Countries shuttled in their black Mercedes-Benzes from one hotel to another, as they always do, to discuss oil prices and supplies before the formal meeting. They eschewed extra guards and metal detectors in hotel lobbies and waded into the surging tide of reporters.

But by the official meeting on Thursday afternoon, the men who control the flow of much of the world's oil conceded bluntly how shaken they were. "The impact of the disaster upon the international oil industry will be profound," said OPEC's president, Chakib Khelil of Algeria, "particularly in the context of the global economic slowdown and its implications for energy demand. Even before 11 September, there was great concern about the extent and the pace at which this slowdown was occurring in the leading industrialized nations. The situation has now deteriorated."

Everything now seems to depend on how the American retaliation takes shape. And OPEC will have to decide how to react, its members hemmed in by the desire to help the global economy and by their own tinderbox domestic politics.

The global economic impact could be huge, with Vicente Fox's reform plans in Mexico, the growing Russian economy and Saudi Arabia's vast welfare state all threatened further if oil revenue plunges. If oil prices fall too low, all oil companies, including those in Texas, will take big hits and be forced to eliminate jobs.

As for consumers, cheap oil usually helps. For every $1 decrease in a barrel of oil, "$5 billion goes into Americans pockets," said Mark Zandi, chief economist at Economy.com. "But oil could go to zero, and that still won't pull the economy out of recession."

Mehdi Varzi, a senior energy consultant at the investment bank Dresdner Kleinwort Wasserstein in London, said: "This attack unleashed certain forces, and everything has become very fluid for the OPEC states. Right now, all they are trying to do is to adjust to that fluidity, that uncertainty."

Mindful of the oil embargoes during the the 1970's and the Persian Gulf war, many people fear that any conflict brewing in the Middle East is bound to disrupt oil supplies. But OPEC is a different cartel than it was 30 or even 20 years ago. While some members have political differences with the West, nearly all realize that they share common economic interests that must be protected, especially at such a volatile time.

Last week, oil prices plummeted to as low as $20 a barrel as the global economy was sinking into recession and as demand for oil evaporated. At any other time, OPEC would have reduced output to prop up prices. But on Thursday, the cartel let current production levels stand — in part, analysts said, because they did not want to worsen the downturn.

"They realize that there's no way you can have an economic recovery with oil at $30 a barrel," said Yasser Elguindi, an OPEC specialist at Medley Global Advisors in New York.

But in helping the West, many oil producers risk domestic instability. Over time, that could hurt supplies. The United States government is widely disliked in the Middle East for policies toward Israel and, to a lesser extent, Iraq. Regimes in oil-producing nations like Saudi Arabia cannot afford to be seen as too ardently supporting the United States. If that happens, the West faces the chance that those states will veer away or that their governments will fall.

"Any public or dramatic cooperation with U.S. policy would only alienate wider sections of the public in Saudi Arabia, Egypt and Yemen, potentially weakening regimes that are currently aligned with the United States," said a report last week from the Petroleum Finance Company, a consulting firm in Washington.

Over the last three years, the once-fragmented 10-member cartel has found new cohesion and worked to increase and decrease supply — essentially micromanaging the oil markets — to keep prices near $25 a barrel. But the attacks shattered an already fragile world economy, and oil prices, which once contributed to the slowdown, have now fallen victim to the recession.

OPEC apparently would like to keep prices between $20 and $25 a barrel, and some economists say that anything much below that would hurt OPEC economies and oil companies without really aiding the global recovery. But the OPEC ministers, powerful men who are used to having their way, seem at a loss as to what to do to buoy prices. Rather than driving world markets, they must now wait to see how consumers and markets respond to the Western campaign against terrorism. And they must take into account what their own people, especially in the Persian Gulf states, make of it.

For all the stoicism of the OPEC delegates at last week's meeting, their anxiety was palpable. "This is probably the gloomiest conference I've attended since February 1999, when oil prices were so low," Mr. Varzi said, echoing the views of traders and other delegates. "People are flabbergasted by the drop in oil prices. The average they follow lost $7 in a week." The basket — the average price of seven different benchmark grades of crude oil — "dropped from $27 to $20," he said.

Despite the sharp fall in prices, it was apparent days before the meeting that OPEC would take no action. Some experts have said the United States government asked OPEC members, particularly Saudi Arabia, the cartel's de facto leader, to hold supplies stable so that oil prices would stay lower during a recession.

But most analysts say OPEC understood even without such an American appeal that for now, it had no room for maneuver. In fact, immediately after the attacks, Saudi Arabia and other Persian Gulf states promised to keep supplies stable. Decreasing output to shore up prices would have made OPEC look greedy. "I don't believe they had to drag anyone into doing this," Mr. Elguindi said. "I don't believe any OPEC member came in wanting to cut production."

Instead, OPEC hopes to end its rampant informal overproduction. It has scaled back output three times this year as global demand has eased and prices have slid. Despite the official quotas members agreed to, nearly all have produced more, especially in the last few months, to cash in on the relatively high price of $25 a barrel or so. Analysts estimate that OPEC is overproducing by 700,000 to 1.3 million barrels a day.

But if an American-led retaliation leads to the deaths of many Muslim civilians, OPEC may be forced to do more to shore up prices, analysts said. No one expects an embargo, but Saudi Arabia, Kuwait and other allies cannot openly support the United States and, to an extent, may have to be openly defiant if their people clamor for it.

In fact, the oil-producing world could have winners and losers. Saudi Arabia has the most to lose and the least to gain. It is the closest ally of the United States in the Gulf, the world's biggest oil producer and home to 6,000 United States Air Force personnel. But it has become a wellspring of Arab extremism, although the ruling Saud family has kept a lid on it so far. If the United States uses Saudi Arabia as a staging ground for attacks into Afghanistan, it could set off enormous anger. Overthrowing the Saud family has long been a goal of Osama bin Laden.

Among the winners could be Iran, which offered condolences to the United States immediately after the attacks and has been removed from the list of possible American targets. While no one expects an "Oprah"- style reconciliation of the United States and Iran, the antiterror campaign and the two countries' mutual antipathy toward the Taliban could help mend fences, analysts said.

As part of the charm offensive, Iran's oil minister, Bijan Zanganeh, told the Reuters news agency on Thursday that he did not mind lower prices. "Now I am comfortable with $22," he said, "because the OPEC basket price is about $20, and $22 is better than $20 for us."

Economists say oil at around $20 would be a good balance for countries that export it, corporations that produce it and consumers. In 1999, with prices near $10, "they were very happy to have oil at $18 to $20," said one Western analyst in Vienna.

"They've just gotten used to two years of high prices," the analyst added. "Anything less than $18 will be hard for them."

The toll has already been heavy on some American oil companies. The stocks of domestic companies and many that drill and service oil wells have plunged two to three times as much as the Standard & Poor's 500 index since the attack.

Should the economy slow so much that oil prices and forecasts for future prices fall to the mid-teens, that could have a big impact on exploration and capital spending by big oil companies. But by and large, they budget for drilling and exploration in large multiyear programs. Price changes over a few weeks are not likely to affect them.

"We have not heard or seen any evidence of our customers reducing spending" after the attacks, said Michael R. Dawson, a vice president at Global Marine (news/quote) of Houston, an offshore drilling company. Big oil companies, he said, "have consistently told us that their capital programs are based on the assumption of long- term prices of $15 to $19 per barrel."

For now, there is a paralyzing tension until an answer is given or a blow is landed. "It's the uncertainty," Mr. Zandi said. "Until that uncertainty lifts, consumers won't be able to go out and spend."

http://www.nytimes.com/2001/09/30/business/30OILL.html?ex=1002513600&en=e02171c45d4ae887&ei=5040&partner=MOREOVER

-- Martin Thompson (mthom1927@aol.com), September 30, 2001