OPEC Quota Is Likely to Be Ignored
Members Are Expected
To Keep Output Strong
To Reap a Profit Windfall
By BHUSHAN BAHREE
Staff Reporter of THE WALL STREET JOURNAL
March 26, 2004; Page A2
The world's oil consumers are scrambling to divine whether the Organization of Petroleum Exporting Countries will follow through next week on a plan to cut supply. But some cartel officials say most members, eager to reap a profit windfall as prices soar, will keep pumping oil flat-out, no matter what OPEC decrees.
The record of the past six months lends support to that scenario. Since September, OPEC twice has called for output reductions, but it is pumping more oil than before, far above its official quota.
OPEC oil ministers will meet Wednesday in Vienna to review output levels. The meeting comes at a sensitive time. Benchmark oil prices in the U.S. last week neared $40 a barrel. Demand is rising fast in industrializing China and India and among American motorists. OPEC members say the U.S. dollar's lower value reduces their return, since oil is priced in dollars. Yesterday, the benchmark U.S. oil price fell $1.50 to $35.51 a barrel in New York Mercantile Exchange trading, in part over OPEC uncertainty. Despite the drop, prices remain above the levels of recent years. (Please see related stories on pages C1 and C4.)
Rising gasoline prices are emerging as a campaign issue in the U.S. presidential race. Yesterday, White House Chief of Staff Andrew Card called on OPEC to boost supplies. "We hope that OPEC will continue to increase production so there can be more supply in the marketplace," he said in an interview on MSNBC. Asked if there was a way to apply pressure on OPEC, Mr. Card said, "We'll be talking with our allies who participate in OPEC and make sure they continue to keep supplies coming."
Even before his comments, senior OPEC officials were letting it be known that ministers are likely to abandon a previous agreement to cut output quotas further April 1. Even if internal squabbling prevents a formal retraction of the cut, OPEC officials and industry experts say, cartel members won't comply with lower quotas while prices are high and demand for oil is booming. OPEC accounts for about one-third of the world's daily oil output, while its exports account for about half of all internationally traded oil. "The majority [of OPEC countries] think the price is very high and might damage demand in the long run," said one senior OPEC official. "The majority doesn't want to cut output."
Still, this official added, OPEC has no plans to announce an increase in production next week to push prices lower. OPEC is producing about 28 million barrels of oil a day. Excluding Iraq, which isn't part of the quota system, the other 10 members of OPEC are producing close to 26 million barrels a day -- far in excess of their official quota of 24.5 million barrels, which is set to fall to 23.5 million barrels on April 1. Thus an increase in official quota levels would simply legitimize the extra supply, not add new barrels to the market, he said.
Eight of OPEC's members are producing at or near capacity. Only Saudi Arabia, Kuwait and the United Arab Emirates have the ability to produce significant additional amounts of crude oil to cool markets. There is no evidence that these countries are preparing to fully open their oil taps. The disconnect between OPEC's official output levels and its members' runaway production is partly a result of forecasters' failure to predict the strong growth in world demand for oil, notably in the U.S. and China. OPEC officials say the cartel's combined output now is three million to four million barrels a day more than many forecasters said would be needed at this time.
In September, OPEC announced a cut in output quotas, effective Nov. 1, to stave off a potential glut when spring came in the Northern Hemisphere, reducing demand for heating oil. Instead of tightening the taps, OPEC members did the opposite. By November, OPEC's output was about one million barrels a day more than the 26.74 million barrels a day it produced in September, according to estimates published by the International Energy Agency, of Paris.
About half of the increase came from Iraq, an OPEC member that isn't part of the quota system and whose war-damaged oil industry is reviving. The remaining 500,000-barrel increase came from the other 10 OPEC members, who had pledged to reduce their output by 900,000 barrels a day. OPEC's output, including Iraq, has stayed near 28 million barrels a day in recent months while prices have soared.
At next week's ministerial meeting, "they will announce they are implementing something, some quotas," says Adam Sieminski, an analyst at Deutsche Bank. "Then they'll go home and completely ignore that unless prices come down."
If prices don't come down, consumers may be in trouble, because OPEC is running out of room to add oil to markets. This month, the IEA reckoned that OPEC's spare oil-production capacity had dwindled to less than two million barrels a day, excluding Iraq. Half that spare capacity is in Saudi Arabia.
---- David Bird of Dow Jones Newswires contributed to this article
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As they say, watch what OPEC does, not what it says.
It seems that the OPEC meetings are basically becoming non-events, mere charades. The only reason OPEC is still in existence is that the other producers are still able to sucker Saudi Arabia (which is basically the only country with any real excess capacity) to do them a big favor and cut back a coupla hundred thousand bpd every now & then. |
