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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Rob Shilling who wrote (32070)	11/24/1998 12:12:00 PM
From: Tomas	Respond to of 95453

Open oil taps? For OPEC, it's not that easy By William Maclean LONDON, Nov 24 (Reuters) - Blessed by mighty reserves and low production costs, OPEC oil powers would seem to have plenty of muscle to pump their way out of trouble when prices slide. Opening the taps looks an obvious way to replace price losses with volume gains for cash-strapped cartel producers trying to survive glutted petroleum markets. It's a plan long touted by those who fret over the gap between OPEC's whopping 75 percent share of the world's reserves and its comparatively humble 40 percent share of global output. But it is one solution the producer club is unlikely to try. Social and political pressures mean the Organisation of the Petroleum Exporting Countries cannot wait through the years it could take for a policy of cheap oil to take effect. ''Flooding the market is akin to shooting yourself in the head rather than shooting yourself in the foot,'' said Geoff Pyne of Warburg Dillon Reed in London. ''This can only happen at very low prices and high short- and medium-term revenue sacrifices,'' said Adrian Lajous, chief executive of state-owned Petroleos Mexicanos. Unfortunately for the 11 developing countries in OPEC, a low cost solution could require a long period of single digit prices before high-cost producers are squeezed out of the market. ''We would die in the process. We have to be responsible,'' said an authoritative Saudi source. OPEC states, reliant on oil to fund big state bureaucracies and utility subsidies, could not contemplate the lengthy social unrest and financial damage that shrunken revenues could stir. ''If they want to secure their future, they need to do that. The problem is how do you survive the interim,'' said Vahan Zanoyan, chief executive of Petroleum Finance Co., a Washington D.C.-based consulting firm. ''It's a crystal clear trade off between short-term needs and long term interests.'' A rethink of OPEC strategy is certainly overdue. The group's ramshackle policy of curbing supply to support prices has failed to reverse a 30 percent price slide this year driven by Asian economic downturn and rising Iraqi production. And historically it has helped keep prices just high enough to make it pay for upstart non-OPEC states to deluge markets with new oil from expensive fields. Analysts say OPEC's real long term response is to diversify its economies away from oil. But in the interim a policy of cheap oil will continue to find some support. Such a strategy could crush unwelcome newcomers, its fans say, by providing a battering ram into markets for OPEC producers enjoying the world's lowest production costs. Pumping at full tilt, OPEC could watch with satisfaction as producers in the challenging North Sea, Gulf of Mexico and other offshore regions who have grabbed customers from OPEC in times of high prices shut down drilling rigs as returns dwindle. ''If they open the taps and let prices go to single digits it would reduce all this hoopla we hear about new prospects in the former Soviet Union,'' Zanoyan. The need for OPEC's tattered quota system would fall away. Supporting artificially high prices through OPEC's production controls has diverted hundreds of billions of dollars into relatively high cost non-OPEC oil at OPEC's expense, Mehdi Varzi of Dresdner Kleinwort Benson wrote in a recent paper. Lower prices would also encourage a recovery in demand that has fallen dramatically with Asian financial crisis. And no less an authority than Royal Dutch/Shell (quote from Yahoo! UK & Ireland: SHEL.L) chairman Mark Moody Stuart suspects volume increases will gradually go to low-cost producers by 2005 or 2010 as normal economic laws reassert themselves over the upside-down world of Big Oil where developments occur in high-cost areas. But opening the taps in a sudden market blitzkreig would damage OPEC because its mostly one-dimensional economies use state oil as a cash cow to finance government budgets. OPEC's core Gulf states are in the sorry position of providing for fast growing populations long used to cradle to grave welfare protection and heavily subsidised utilities. Welfare remains lavish. In many states income tax is unknown, gasoline is cheaper than bottled water and civil servants retire on full pension after 20 years' work or less. And with the exception of the United Arab Emirates, payment of 1990-91 Gulf War costs means Gulf Arab states no longer enjoy the enormous financial cushion they once took for granted. In populous Venezuela and Nigeria, shrunken revenues would also play havoc with development plans intended eventually to drag their politically-combustible peoples out of poverty. biz.yahoo.com