Analysis: OPEC risks losing grip on the oil market Saturday, 9 September 2000 1:50 (ET)

Analysis: OPEC risks losing grip on the oil market By SAJID RIZVI

LONDON, Sept. 9 (UPI) -- After more than a year of an unprecedented swayover the market, OPEC risks losing control of what it has come to see as its strategy of balancing crude oil output against price for optimum profit.

For all practical purposes the strategy isn't working, as the 10-year price high of Thursday starkly demonstrated.

The $35.46 a barrel record price looked like good news for the 11 member countries of the Organization of Petroleum Exporting Countries. But, infact, the hike signaled tougher times ahead for OPEC's decision-makers before a weekend meeting of the group's oil ministers in Vienna.

The higher the price goes the harder it will be for Saudi Arabia, the world's and OPEC's top producer, to convince cash-hungry, deficit-ridden countries within and outside OPEC to increase their production. Added to this difficulty is the continuing ideological divide that pits Saudi Arabia against Iran, which opposes any substantial increase.

OPEC economies languished when oil prices collapsed to $10 a barrel in 1998. The fall was precipitated by East Asia's economic woes but began after an ill-timed OPEC increase in output quotas. The nightmare scenario of huge losses in oil revenues, that forced savage cuts in OPEC's development spending, is readily invoked by Iran and other members each time the group is asked to raise its output.

In March last year, OPEC began a dramatic recovery, coaxing the price upward through a series of deftly maneuvered cutbacks in its overall production. Skepticism gave way to awe and then fear as OPEC's production discipline cut deep, pushing the prices upward despite two consecutive increases in output this year.

Several non-OPEC producers, including Mexico, followed OPEC's example as they saw lucrative profits in holding production back. But recent market movements indicate that it's easier to reduce output without risk of immediate damage than to start releasing more oil, when others may be doing the same and risking a global glut.

Friday's price slide was a response to reports that more oil could soon be flowing. Crude oil for October deliveries fell $1.76, or 5 percent, to $33.63 a barrel on the New York Mercantile Exchange -- the biggest decline since July 5. On London's International Petroleum Exchange, the North Sea Brent crude for October fell $1.77, or 5.1 percent, to $32.78 a barrel.

The price dive left traders and industry analysts unimpressed. "This is temporary, what the market needs is something that lasts longer," said a senior industry executive." But there is no sign yet of the oil price retreating to levels below $25 a barrel, the ceiling cited as being acceptable to both producers and high-consumption industrial countries.

Thursday's record rise was the highest level reached since November 1990, during the Gulf War over Iraq's occupation of Kuwait. Unlike the price increases following OPEC's cutbacks last year, this hike was not something OPEC wanted. Saudi hints of an imminent increase in output of up to 800,000 barrels a day eased the rise somewhat, but not significantly enough.

That bothers analysts who feel that OPEC's influence on the market may bewaning.

Saudi Oil Minister Ali al-Naimi said this week the country favors a benchmark price of between $22 and $28 a barrel, but he gave no hint whether the kingdom would pump more oil if other producers failed to raise their quotas.

Already OPEC ministers have focused on taxation in the consumer countries as the main reason for high energy prices. Al-Naimi even suggested that consumer nations could start by cutting fuel taxes to bring down energy costs. In some European nations, taxes represent almost three- fourths of the cost of gasoline at the pump.

But a lower tax route is unlikely to be adopted, despite spreading unrest in France and Britain over high fuel costs. Instead, pressure will continue to build on OPEC to raise output to stem the price spiral and help bring down the prices.

Earlier this week, President Clinton approached Saudi Arabian Crown Prince Abdullah to express his concern. United Nations Secretary-General Kofi Annan Friday joined in the clamor for an increase in production and lower prices.

When the ministers gather in Vienna this weekend they will be debating a third increase in oil output quotas this year. Determining the extent of an increase would be the key, as too small a rise will undermine OPEC's credibility in the marketplace.

Al-Naimi told reporters he believed the organization has a spare capacity of 3 million barrels a day. No one seriously expects OPEC to produce 3 million barrels a day more. But there is little confidence among analysts that anything short of a million barrels a day can restore to OPEC the ability to infuence the market.

http://www.vny.com/cf/News/upidetail.cfm?QID=116220

-- Martin Thompson (mthom1927@aol.com), September 10, 2000

Answers

Lots of politics, but, let's face it. OPEC only controls 30% of the world oil market now.

-- Wellesley (wellesley@freeport.com), September 10, 2000.

CBC

Sun Sep 10, 12:20 am

OPEC expected to pump up oil production

OPEC oil ministers are expected to announce another boost in the production of crude oil at a meeting in Austria Sunday, the third increase this year.

But analysts don't think the move will reduce high prices at the pumps.

Industry observers predict the world supply of oil will go up by between 500,000 and 700,000 extra barrels a day. Iran and Alegeria are said to support a jump of at least half a million. Others, such as Nigeria and Saudi Arabia, endorse bigger increases.

But economists doubt that even a million extra barrels a day would be enough to lower the price of crude to the $25 US per barrel that OPEC has said it would like to see.

Currently the price of oil is hovering between $33 and $34 US per barrel, a 10-year high.

OPEC has repeatedly denied accusations that high prices at the gas pumps in North America and Europe are its fault.

The cartel blames speculators, oil company mark-ups, limited refinery capacity and stocks, and government taxes for pushing up the price.

OPEC further claims that the high oil price isn't good for the organization. It reduces demand and pushes up inflation around the world, stunting economic growth, and thus, demand.

France is just the latest example of what the OPEC ministers are talking about. The country is currently in turmoil as truckers and farmers paralyse the country in an attempt to get taxes on fuel reduced.

On Saturday, the truck owners in France who were leading the protests against high fuel prices gave the order to lift the blockade.

Demonstrations began six days ago with the truckers choking off access to refineries and fuel depots. Taxis joined, reducing traffic to a snail's pace.

The protest then spread to Britain, the country with the highest gas taxes in Europe. Fuel costs in the region are double what North Americans pay.

Analysts point out that if OPEC comes up with an agreement to increase production, the new oil will take 40 to 50 days to reach refineries  and even longer to reach consumers.

-- Rachel Gibson (rgibson@hotmail.com), September 10, 2000.