Officials: OPEC's Oil Price Gambit Was Fueled by U.S. Miscalculations

7:00 a.m. ET (1200 GMT) March 22, 2000 By Martin Schram WASHINGTON  Suddenly, in the midst of unparalleled economic prosperity, Americans have been jolted by an unexpected sticker shock. Heating oil prices have doubled. Diesel prices too. And gasoline prices have jumped to as much as $2 a gallon.

AP/Wide World A tractor-trailer in Boston participates in a protest by some 60 truckers angry at skyrocketing diesel oil prices

All of which leads to the key question: What did the Energy Secretary know  and when did he know it?

Also: What did the Clinton administration do  or fail to do  and why? And, ultimately: Who, if anyone, is to blame?

What actually happened inside the Energy Department is that for month after month last year, the department's top estimators overestimated the amount of oil OPEC countries would actually produce, according to the department's internal data and interviews with top-level officials.

In a series of extraordinarily candid interviews, these officials detailed just how and why they guessed wrong.

This Time, OPEC Countries Didn't Lie

America's top energy estimators were convinced OPEC's member countries would quietly cheat  just as they had in past years. The department's estimators assumed that OPEC's member countries would not hold to their officially announced commitment to reduce production in an effort to force increases in the price of crude oil. They were convinced that once the prices were increased, the countries would begin to quietly increase their production, one by one, in order to cash in on the higher prices for themselves at the expense of their fellow cartel members.

'OPEC ... consistently beat our estimates of how much they'd reduce their production,'  Jay Hakes "OPEC ... consistently beat our estimates of how much they'd reduce their production," said Jay Hakes, the administrator of the Energy Information Administration. Hakes heads the independent statistical agency that operates within the Energy Department and supplies the secretary with the estimates that are then passed on to the president. Hakes and his administration provided a candid look at his agency's inner workings  and underestimates.

One year ago, when OPEC announced that it would significantly cut production in three stages until it reduced production by 4.5 million barrels a day, the department's top estimators remained far from convinced. "You can say in hindsight that at that point there was going to be a problem," Hakes said. "But there were at that point still a lot of unknowns. ... There was the assumption, based on its history, that OPEC's members would cheat, as they had in the past."

Detailed interviews with top officials inside the department and former officials  and their own statistical documents  reveal a series of oil estimating decisions that are far more complex than one might presume from the now-oft quoted comment made last February by Energy Secretary Bill Richardson in Boston's Faneuil Hall.

Speaking at a New England Heating Oil Summit of government officials, truckers, and consumers who were all concerned about the doubling of their winter heating oil bills, the secretary, who has made a career out of quick-response candor, uttered an explanation that has gained him unwanted political infamy.

"We were caught napping," he said. "It's obvious the federal government was not prepared. We got complacent."

Karin Cooper/AP Secretary of Energy Bill Richardson says he is confident OPEC will boost oil production, but the question is how much and how soon The secretary and his spokespeople have been at pains ever since to explain that his comment was intended only to explain the regional heating oil crisis in New England. They note that a sudden 10-day cold snap occurred just when heating oil stocks suddenly fell sharply just before the New Year  which could be partly attributed to fears about Y2K shortfalls.

But no matter  Richardson's comment immediately came to be characterized as an admission of oil policy failure by the Cabinet official whose job it is to make sure that the government is never caught napping, never complacent, always prepared.

But the real story, top officials said, is that they were not napping or complacent  just wrong. They painted a picture with words and numbers of how they made their best estimates, but just guessed wrong, month after month.

Douglas MacIntyre is the official whose job it is to make the estimates for the Energy Information Administration. He made available the table that shows his calculated estimates, made month by month, of what he expected OPEC's countries to produce, in each quarter of 1999 and the first quarter of 2000.

Click her for graphical representation of oil stocks and estimates.

The data and his explanations reveal a degree of candor that is unusual by any norm of government or industry. What his calculations showed was that between April and August of last year, he repeatedly under-estimated the determination of the OPEC nations to reduce their production. And, of course, the more OPEC reduced its production, the more the price of oil increased.

Estimates MacIntyre made in April 1999 of the reductions OPEC would achieve for each succeeding quarter were off significantly from what he later saw that OPEC had achieved. His projection for the second quarter of 1999 was off by three percent; his projection for the third quarter was off by five percent; his figure for the fourth quarter was off by nine percent; and his estimate for the amount OPEC would reduce its oil production by in the first quarter of this year was off by an estimated 11 percent from what he now figures OPEC's final figure will be.

For Broadband Users Only Requires Windows Media Player and Flash Plug-in "We thought all along that by the fourth quarter of 1999 or the first quarter of 2000 prices would be significantly higher  and that would give some of the countries the incentive to cheat," MacIntyre said. "In the past, Venezuela had been the biggest cheater. Its past strategy had been [once the price of oil had climbed] to encourage investment, increase its own production and get all the money it could." But this time, he said, Venezuela, led by a new president, held firm to the OPEC line.

His estimates made in May, June and July similarly under-calculated what OPEC would actually be able to accomplish in its goal of reducing production to keep supplies low while demand was high.

"By August, we were finally convinced they were going to be doing better than we thought," MacIntyre said in an interview. "And as I look back at my table, I can see that I made a significant change in August, once I was convinced they [the OPEC countries] were not cheating."

Just what, if anything, could the Clinton administration officials have done to convince OPEC to halt its effort to cut production and force price increases?

"I have a lot of sympathy for Secretary Richardson," said James Schlesinger, the Carter administration's secretary of energy (who served before that as secretary of defense and director of the CIA). Schlesinger believes that the Saudis and the Kuwaitis require the involvement of the president if they are going to be convinced of the need to roll back their production decisions. "In 1979, President Carter negotiated himself with the king of Saudi Arabia over oil," Schlesinger said.

President Clinton is said by officials to have gotten personally involved, making several telephone calls to leaders of oil producing countries. And Richardson conferred with the Saudi oil minister in California last week and is traveling to oil-producing countries in Africa before going to Vienna for what will be a crucial OPEC meeting on March 27.

Richardson has said publicly that he expects OPEC countries have now gotten the message. His job has probably been made a bit easier, officials agree, by the fact that the U.S. media has been filled recently with stories of public anger at OPEC and the soaring gas prices. And with stories and pictures that recall the oil crises of the 1970s  crises that forced motorists to wait in long lines at the pumps and contributed to Carter's reelection defeat in 1980.

Richardson says he expects OPEC will increase production once again, thus ending pressures that will keep pushing prices higher.

"We expect they will increase production," Richardson said on CBS News' Face the Nation, just hours before departing on his trip. "If that increase is sizable enough  and in timely fashion  in late spring or early summer you will see a gradual decrease in gas prices and diesel prices."

http://www.foxnews.com/elections/032200/oilprices_schram.sml

-- Martin Thompson (mthom1927@aol.com), March 22, 2000