Plummeting oil prices could bring badly needed relief to battered U.S. economy

Friday, November 16th 2001, 12:00 am
By: News On 6

VIENNA, Austria (AP) _ Oil prices plunged to their lowest level in more than two years despite efforts by OPEC to stop the free fall, which analysts said could further push down prices at the gas pump.

Setting up a showdown with Russia and other producers outside the cartel, the Organization of Petroleum Exporting Countries _ struggling to stabilize plummeting prices _ agreed Wednesday to cut output beginning next year, but only if non-OPEC producers also tighten their taps.

OPEC delegates said they would reduce their daily production target by 1.5 million barrels, or 6 percent, starting Jan. 1, on the condition that outsiders such as Russia, the world's No. 3 producer, cut their own output by 500,000 barrels a day.

As the market moved closer to an oil price war, traders reacted almost instantly to the uncertainty with a sharp sell-off in petroleum futures.

December crude oil futures dropped as low as $17.15 a barrel on the New York Mercantile Exchange on Thursday before closing down $2.29 at $17.45 a barrel, the lowest level for a front-month contract since June 1999.

December heating oil futures tumbled 5.03 cents to close at $51.09 a barrel, their lowest level since August 1999, while the December gasoline futures contract ended down 4.53 cents at 48.84 cents a gallon, a 29-month low.

The global economic slowdown has dented demand for crude, and lingering uncertainty from the terrorist attacks on the United States has worsened OPEC's financial problems. Prices have tumbled by a third since Sept. 11 alone.

Although analysts warned that a prolonged slump in oil prices could discourage companies from exploring new fields and developing older ones _ setting the stage for sharply higher prices in the future _ the immediate fallout could be lower prices for consumers for gasoline and home heating oil.

For the short term, at least, they could also provide relief to airlines skirting bankruptcy since the attacks by cutting prices for jet fuel, and help truckers by easing diesel prices.

``This is good news for a world economy that could use a boost right now,'' said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y.

But in the longer term, the unfettered drop in crude prices will hurt the global economy, experts say.

``I think we don't want to see a collapse in oil prices,'' said Joe Quinlan, international economist at Morgan Stanley in New York. ``Sure, it's a near-term positive for the global economy but it doesn't do any good for developing countries.''

OPEC supplies about a third of the world's oil and has a daily production target of 23.2 million barrels. It has already curtailed its official output this year by 3.5 million barrels a day without a meaningful contribution from non-OPEC producers.

On Thursday, its most powerful member _ Saudi Arabia, the world's top oil producer _ revealed its frustration at Russia's refusal to make anything more than a token cut in output. OPEC sees Russia's cooperation as an essential part of the group's effort to stem the collapse in oil prices.

OPEC would ``absolutely not'' cut production without a corresponding decrease of 6.5 percent in oil exports from Russia, Oman, Mexico and Norway, Saudi Oil Minister Ali Naimi told reporters.

``We are in a crisis mode and we need help,'' he said.

In a note of brinksmanship, Naimi said OPEC would pursue its strategy of shared output cuts even at the risk of seeing prices fall further ``until everyone cooperates.''

Kuwaiti Oil Minister Adel al-Sabeeh said Thursday that crude prices could fall as low as $10 a barrel if the current standoff between OPEC and non-OPEC producers over oil output persists.

Russia's second-biggest oil company reacted lukewarmly. ``I found this offer unacceptable, and Russia could only talk about a medium- and long-term output ceiling,'' said Mikhail Khodorkovsky, chief executive of OAO Yukos.

Because their oil fields are located mostly in Siberia and frigid northern areas, Russia's oil companies must keep their equipment running to keep their wells from freezing over, Khodorkovsky said in Moscow.

``We are unable to regulate our output just by turning a knob as the OPEC and southern non-OPEC countries can,'' he said.