OPEC Expected to Agree on Production Cuts to Halt Two-Year Slide in
Prices
OPEC, Hammered by Low Oil Prices, Wants to Cut Output (Update1)
(Adds analyst forecast in 6th paragraph.)
Vienna, March 21 (Bloomberg) -- Oil ministers from the
world's top producing nations this week will revive efforts to
end a two-year price slump that has slashed their revenues and
cut oil company profits.
The Organization of Petroleum Exporting Countries, an 11-
nation group that controls two-fifths of the world oil supply,
is expected to agree on plan to cut world oil supply 2.7 percent
at a meeting Tuesday at OPEC's Vienna headquarters.
No one knows if the cuts would be big enough to boost oil
prices, now about half 1997's peak price. Even if OPEC members
approve the plan, hammered out in meetings this month, they are
unlikely to fully comply with its terms. Producers are about 25
percent short of keeping their output cut commitments made last
year, and oil executives are skeptical about the new plan.
''The world is going to be watching every barrel of oil
that is lifted in every corner of the world where OPEC
produces,'' said Archie Dunham, chief executive of Conoco Inc.,
the fifth largest U.S. oil company.
Twice last year OPEC and its allies agreed to cuts totaling
3 million barrels of oil a day, or about 4 percent of world
supply. Those cuts simply weren't enough. Benchmark Brent crude
oil closed at $13.45 a barrel Friday, near the $13.11 price on
June 25 when the last set of cuts was agreed.
Oil prices have risen 41 percent since hitting a 12-year in
December on expectations for improving demand and more OPEC
output cuts. Forecaster Leo Drollas at London's Centre for
Global Energy Studies expects the price rise at least $1 a
barrel by year-end.
Price Impact
Low oil prices have been good for motorists and airlines,
and they have helped hold back inflation around the world. But
they've been disastrous for producers and oil companies.
OPEC revenue fell 36 percent last year to $104 billion,
well off its peak of $283 billion in 1980, according to a study
by Arthur Andersen. Saudi Arabia's formerly steady currency has
faced attack from speculators figuring on a devaluation.
Profits at big oil companies dropped between 9 percent and
90 percent last year, and dozens of smaller U.S. oil companies
went bankrupt, pushing U.S. output to a 49-year low. Producers
led by Texaco Inc. and the Royal Dutch/Shell Group last week
pressed the White House for tax relief, though to no avail.
''The crisis has led to wage cuts, employee layoffs, the
shutting-in of oil and gas wells, and the paring down of
business operations to a minimum,'' said George Yates, chairman
of the Independent Petroleum Association of America. The U.S.
oil industry lost about 50,000 jobs last year, Yates said.
Big Oil has slashed investment in new oil production, and
isn't willing to spend more until prices revive. ''We're trying
to be very good shepherds of our cash,'' said Dunham of Conoco,
which cut capital spending 24 percent this year and won't boost
its budget until prices rise at least another $1.50.
OPEC's cuts last year were an attempt to reverse a badly-
timed decision in November 1997 to boost output just as Asian
demand began to crumble and exports from Iraq almost doubled in
1998 through a United Nations sales program.
Endorsement
This week, OPEC members and a few non-OPEC oil producers
will try to ratify a plan assembled earlier this month by five
nations led by Saudi Arabia, the world's biggest oil exporter,
to cut supply another 2 million barrels a day. Ministers from
Kuwait, the United Arab Emirates and Qatar endorsed the Saudi
plan at a meeting in Abu Dhabi yesterday.
Success is far from guaranteed. At its last meeting in
November, OPEC failed to agree on further output cuts because
members were preoccupied with feuding about non-compliance with
earlier cuts.
As always, OPEC ministers are optimistic they've got the
right formula this time. ''This agreement will succeed more than
previous ones because it is supported and backed by the highest
authority of every government involved in the process,'' said
Saudi Arabian Oil Minister Ali Naimi.
Results
Oil companies, though, have heard it all before. They are
more interested in action than platitudes. The new cuts are to
start April 1 and oil company forecasters say it will take
months to see results.
''It won't be one to two months; it will be quite a while
before oil markets come back,'' said Ken Haley, manager of
energy forecasting at Chevron Corp., the fourth-largest U.S. oil
company. The five-nation agreement made this month in The Hague
will ''change market psychology'' if tangible signs of success
emerge in the next few months, he said.
Others are more optimistic. ''In the past OPEC's members'
compliance with pledged cutbacks has been poor, and ruined the
moves it's made to raise prices by cutting output. This time
they look serious about the cutbacks, although I've said that
before,'' said Mehdi Varzi, oil analyst at Dresdner Kleinwort
Benson in London.
''They do mean business this time,'' said John Lichtblau,
chairman of the Petroleum Industry Research Foundation and a
long-time OPEC watcher. ''The fear that prices could go down
again demands that they adhere'' to promises.
Gasoline
If OPEC is successful, gasoline prices will eventually work
higher too, which may come as a shock to American motorists who
are now getting used to motor fuel at its lowest ever price,
adjusted for inflation.
Average regular unleaded in the U.S. rose a penny in the
past month to 97 cents a gallon, the first rise in five months,
according to the American Automobile Association. Retailers may
see their profits squeezed as they fight to hold customers,
though few, if any, in the oil business are worried that
motorists will buy less.
''Gasoline is so cheap already,'' said Michael Busby, crude
and refined products trading manager at Northville Industries
Corp. in Melville, New York, the nation's top gasoline importer.
''Between $1 and $1.20 a gallon I don't think people will change
their driving habits.''
Economists will keep a close eye on oil if it continues to
rise, though most agree that the world isn't poised for another
bout of rampant inflation as in the 1970s.
''You'll see it start to affect the consumer price index in
a minor way, but the magnitude is much, much smaller,'' said
Mickey Levy, chief financial economist at Nationsbanc Montgomery
Securities in New York. ''From $11 to $14 (a barrel) isn't the
tripling we saw in the 1970s.''
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