Norway Boosts Oil Production 2125 GMT, 000630

Norwegian Oil Minister Olav Aklselsen announced June 29 that Norway would abandon the oil production ceiling it adopted last spring. Norway adopted the ceiling in response to a request by the Organization of Petroleum Exporting Country (OPEC) to cut production in order to raise oil prices.

This will increase Norways daily oil output by 100,000 barrels beginning July 1. In and of itself, Norways decision will not affect global oil prices. However, Oslos actions could trigger a breakdown in the agreement between OPEC and non-OPEC producers to limit production, resulting in a moderation of crude prices.

Currently, global oil production stands at 76 million barrels per day. Since consumption normally increases in the summer months and overall demand grows at an average of 2 percent per year, Norways decision to increase production by 100,000 barrels will have, at most, a marginal direct effect. But other oil producing states will see Norways action for what it is: profit taking. With oil prices hovering just above $30 a barrel, the increase amounts to additional revenues of $3 million a day.

Other oil producers will be sorely tempted to follow Norways lead. Like Norway, Mexico has extra capacity and is not an OPEC member. Furthermore, since the bulk of Mexican oil finds it way north to the United States, Washington is sure to pressure Mexico City to increase production as well. Mexico could supply another 100,000 barrels.

Yet this, too, is not enough to significantly affect crude oil prices. OPEC as a whole agreed to increase their collective output by 700,000 barrels daily at their June summit and prices barely budged.

* Saudi Arabia is by far the largest producer. Still it has the potential to add 3.3 million bpd to its already substantial exports of 6.8 million bpd. .

But if Mexico joins Norway in boosting production and prices remain stable, individual OPEC members will be tempted to increase production themselves. Here U.S. pressure on states that depend on American security guarantees  Kuwait, Saudi Arabia and the United Arab Emirates  would prove decisive. These three states could potentially increase production by more than four million bpd. Such a large increase is unlikely since Saudi Arabia continues to champion the production cuts, but a moderate increase is certainly an option.

Norways decision to break ranks with other producers will not collapse prices  growing global demand has ensured that supplies are tight  but it will cause a weakening of the OPEC wall. The result will be moderated prices as individual OPEC members, some under American pressure, seek to gain some additional income while demand and prices remain high.

http://www.stratfor.com/europe/commentary/0006302125.htm

-- Martin Thompson (mthom1927@aol.com), July 01, 2000