OPEC to cut oil output by 4 percent
By Bruce Stanley
Associated Press
VIENNA, Austria — By cutting crude production for the second time this year, OPEC hopes to halt the recent slide in oil prices that offered hope of cheaper fuel for consumers in the United States and other importing nations.
The Organization of Petroleum Exporting Countries decided yesterday to curtail its official output by 4 percent, or 1 million barrels of oil a day, in an effort to avoid supplying markets with too much crude at a time of economic turmoil and weak seasonal demand.
In Washington, the Bush administration called the decision "disappointing'' in light of a struggling world economy.
The action "demonstrates the importance of increasing America's domestic production and developing a national energy policy that will ensure a stable, reliable, affordable and diverse supply of energy,'' Energy Secretary Spencer Abraham said in a statement yesterday.
But some energy analysts suggested that next month's production cut won't have a significant impact on the prices consumers pay for gasoline and other refined products.
"On a retail level, prices will probably firm up a little bit, but they're not going to spike as they did last year,'' said Lawrence Eagles, head of commodity research at the London brokerage GNI Ltd.
The cartel announced its cut, which was at the upper end of most analysts' expectations, after two days of talks in Vienna.
OPEC delegates debating the size of the decrease were forced to consider the effect the current slowdown in global economic growth has on demand. Consumer confidence has eroded, with share values plummeting from New York to Tokyo and fears of a recession rising.
The cartel already was expecting demand to ease somewhat in the next few months because of warming weather and a decline in purchases of heating oil in many key markets.
"The present weaker world economy and the traditional sharp downturn in demand associated with the second quarter both clearly point to the need for a correction in oil supply, and the conference has taken the decision to stabilize the oil market,'' OPEC said.
As of April 1, OPEC will trim its output quota to 24.2 million barrels a day from its current level of 25.2 million barrels. Analysts had generally forecast a decrease in output of at least 500,000 barrels a day.
However, the extent to which individual OPEC members will comply with their new targets is unclear. Venezuela and Nigeria, among others, have had a history of busting their quotas.
Last month, the cartel produced some 500,000 barrels above the daily target it set in January, when OPEC members agreed to top 1.5 million barrels off their previous quota.
This overproduction means that even if OPEC reduces its official output by 1 million barrels a day, the actual decrease in output might equal only half that amount.
"If OPEC had complied in February, they wouldn't have to cut now,'' said Mehdi Varzi, a senior oil analyst at the investment bank Dresdner Kleinwort Wasserstein in London.
Another variable is Iraq, one of OPEC's largest producers. Because the United Nations regulates its oil exports, Iraq is the only one of OPEC's 11 members that doesn't participate in the group's production agreements.
Iraq has withheld crude from the market since December because of a pricing dispute with the United Nations. If Baghdad were to resume pumping the 2.8 million barrels a day it produced last autumn, that could upset the delicate balance of supply and demand that Saudi Arabia and the rest of OPEC are hoping to achieve.
By trying to firm up prices, OPEC risks being accused of worsening the global economic downturn. Mike Rothman, head of energy research for Merrill Lynch in New York, said such accusations would be unfair.
Rothman said the price of oil is much less important to the overall health of the U.S. economy than it used to be, and noted that the economic productivity represented by a barrel of oil has more than doubled since the Arab oil embargo of 1973.
Analysts saw little connection between OPEC's production cut and tumbling share prices.
Still, Bill Edwards, an energy consultant in Houston, reacted with alarm to the size of the cut. He predicted that crude prices could increase by as much $6 a barrel and gasoline prices by as much as 30 cents a gallon.
Others foresaw a much less dramatic impact for consumers.
Heather Rowland, an oil strategist at UBS Warburg in New York, said average retail fuel prices over the next 12 months might actually decline compared to the same period last year. Prices at the pump might be "a few cents lower'' than they were last summer, when prices in some parts of the United States spiked after refinery bottlenecks caused local shortages.
The average U.S. retail price of gasoline fell almost two cents during the two weeks ending March 9, according to the Lundberg Survey of 8,000 filling stations.
The decrease marked the fourth straight week that gas prices had declined because of lower crude prices. National weighted average prices were down about 11 cents from the same period last year, industry analyst Trilby Lundberg said last week.
Oil markets were closed Saturday but had surged higher, then retreated Friday on the likelihood of a cut in OPEC production. Contracts of light, sweet crude for April delivery closed at $26.74 a barrel, up 19 cents, on the New York Mercantile Exchange.
"I think a million barrels a day is already more or less factored into the market,'' Varzi said.
