March 22, 1999
OPEC Is Poised to Cut Output, Lift Oil Prices
By YOUSSEF M. IBRAHIM
VIENNA, Austria -- As they slipped out of their black limousines into
luxury hotels dotting the contours of Vienna's graceful Stadtpark
Sunday night, officials of OPEC, the nearly moribund oil cartel, were
stirring with new life, ready to jolt oil prices back up.
If all goes well at an emergency meeting set for Tuesday here, the
Organization of Petroleum Exporting Countries, in partnership with major
oil producers like Mexico and Norway who are not members of the group,
will take more than 2 million barrels of oil a day out of world markets,
starting in April.
It would mark the first time in 13 years that the cartel has taken such a
drastic measure, largely because of the pressing needs of the largest
producer, Saudi Arabia, and other producing countries to generate more
revenue, experts say.
Anticipation of the move -- which has emerged as OPEC officials
formulated it in secret and in public talks held in Riyadh, The Hague,
Dubai, London and other cities in the last four weeks -- has already pushed
prices up 20 percent, bringing the American benchmark brand known as
West Texas Intermediate to $15 a barrel.
This has halted, for a while at least, the steady fall in prices that devastated
the world energy industry in the last year.
Part of the impact reflects optimism in the oil industry that salvation is on
the way. In the last decade, globalization, competition from new oil
suppliers and disputes within OPEC combined to send oil prices into a
seemingly endless tumble to a point where gasoline and fuel prices today
are, in inflation-adjusted prices, the lowest since the end of the World War
II.
Now, a confluence of new circumstances may help the cartel reverse some
of these trends. Among other things, the Asian economic crisis, which
erased more than 1.5 million barrels a day in demand for oil, is stabilizing.
Iraqi oil production is also stabilizing. In 1998 Iraq more than doubled its
oil production to 2.5 million barrels a day as the United Nations allowed it
to sell more oil under its oil-for-food sanctions regime. That ceiling cannot
increase much more now unless the United Nations sanctions are removed
altogether -- something the United States would not allow.
Above all, the pain of lower prices has piled mountains of debt onto the
economies of many oil-producing countries, cut their government budgets
down to a point of endangering social and political cohesion, and ravaged
oil company profits worldwide -- enough to create a consensus for OPEC
discipline and worldwide cooperation.
"The worst seems to be over," said Robert Mabro, director of the Oxford
University Institute for Energy Studies in England. "They have to act
because low prices are deeply hurting producing countries and oil
companies. Hard currency revenues are shrinking dangerously in places like
Nigeria, Venezuela, Russia, Mexico. Multinational oil companies have cut
costs to the bone, laid off thousands of people and seen their profits
evaporate. Everybody wants a solution,"
Underlying the seriousness of the action, Saudi Arabia, the world's largest
oil producer and most important OPEC member, has agreed to take the
biggest cut, shutting down half a million barrels of oil a day of its
production starting in April. "As far as we are concerned, it's a done deal,"
said a senior Saudi official in Riyadh, who asked not to be identified. "We
are informing customers right now that deliveries will be cut."
Iran, Kuwait, Venezuela, Algeria, Libya, Indonesia, the United Arab
Emirates, Qatar and Indonesia are joining in with cuts that total about 1.5
million barrels a day. Norway and Mexico, major oil producers and allies
of the United States who are not members of OPEC, intend to cut their
production by a combined 350,000 barrels daily.
This is a remarkable show of solidarity unseen since 1986, when a similar
collapse in prices led producers to drastic and coordinated production cuts.
While still frowning on any concerted action to control prices of such a
vital commodity, the United States appears not to object to stronger oil
prices, which would also help the American oil industry. It too has been
deeply hurt by the price collapse, resulting in the loss of thousands of jobs.
"We feel that lower oil prices are good for consumers, but we recognize
they can have a negative impact domestically and on some of our friends
like Venezuela and Mexico," Energy Secretary Bill Richardson said in a
telephone conversation from Washington on Friday. "So far, OPEC's
response has been responsible and restrained."
It is Saudi Arabia, the cartel's undisputed master and America's staunch
Persian Gulf ally, that holds the fate of the accord in hand.
As owner of the world's largest petroleum reserve, Saudi Arabia had two
ways to go.
"They could go back, as they have done now, revert to their old standard of
constraining production and hope that prices will go up," said Anthony
Miles, senior vice president at the San Francisco office of the Boston
Consulting Group. "Or they can swing all the way, pumping as much oil as
possible, and the guys with the most oil will win."
It will take some months to determine whether OPEC's new discipline will
hold. The big deterrent to cheating is Saudi Arabia's unique ability to flood
the market.
With prolific oil fields, Miles and other experts point out, the desert
kingdom can pump more than 10 million barrels a day at minimal extraction
costs of $1 a barrel. This flooding would bring prices down to as low as $5
a barrel in a few months. Few oil-producing countries can take this
possibility lightly. In the long run, it would put many producers out of
business in the United States, the Caspian Sea, Russia and the prolific North
Sea shared by Norway and Britain, where production costs range from $5
to $10 a barrel.
The Saudis' need to produce higher revenues has become compelling. Piling
one budget deficit over another in the last decade, Saudi Arabia has
accumulated a debt of $130 billion, the equivalent of its entire annual
economic output.
As a result, after tenaciously clinging to a level of production set since
1990 at 8 million barrels a day, Saudi Arabia for the first time has offered
to lower it to 7.5 million barrels a day. This is a fundamental change in
policy.
"The eight-million level was practically untouchable -- it had become an
icon-hobbling policy," said Amy Myers Jaffe, a senior oil analyst at the
Baker Institute at Rice University in Houston. "The willingness to abandon
it shows the urgency they attach to higher revenues now."
nytimes.com
Charles |
