OPEC Deal May Not Be Enough

Monday, September 11th 2000, 12:00 am
By: News On 6

VIENNA, Austria (AP) — OPEC's official agreement to boost oil production by 3 percent may not add enough new crude to world markets to roll fuel prices back decisively from 10-year-highs, analysts say.

Fuel prices dipped at first but then shot higher on commodity markets Monday amid skeptical reactions to OPEC's decision to add 800,000 barrels on top of its daily production target of 25.4 million barrels.

The head of the International Energy Agency, Robert Priddle, warned that OPEC's planned increase is unlikely to stabilize oil markets, and even OPEC president Ali Rodriguez expressed doubt that the cartel's decision would significantly dampen prices.

October contracts of North Sea Brent crude climbed 77 cents higher at $33.55 a barrel on the International Petroleum Exchange in London, after slipping as much as 93 cents earlier in the day. Contracts of light, sweet crude surged $1.57 to $35.20 on the New York Mercantile Exchange.

The Organization of the Petroleum Exporting Countries formally announced the increase Monday, in the face of mounting international pressure to pump more crude and cool sizzling prices.

Their new daily quota of 26.2 million barrels will take effect Oct. 1, and OPEC members agreed to meet again Nov. 12 to reassess market conditions.

OPEC secretary General Rilwanu Lukman acknowledged that oil prices were high, but he told a news conference that they don't threaten global economic growth.

``There is no shortage,'' he added. ``Some people are having to give hefty discounts in order to get rid of their current production.''

Analysts warned that the bulk of OPEC's planned increase, which was roughly in line with what many had predicted, will serve only to legitimize the 700,000 barrels that OPEC members are already estimated to be producing each day above their current quotas. As a result, analysts expect the impact on prices will be meager — particularly for Americans who depend on heating oil to warm their homes.

Jareer Elass, a Washington-based energy consultant, said the increase would do little more than ``cap'' prices at around current levels.

Priddle of the IEA said the output decision was unlikely to stabilize volatile markets, due partly to questions about the actual number of fresh barrels to be pumped and the outcome of OPEC's November price review.

``The producers say they have set themselves the objective of achieving stability through unilateral market management. So far they have achieved just the reverse,'' he said in a statement.

The Paris-based IEA is part of the Organization for Economic Cooperation and Development, a group of the world's wealthiest countries.

Rodriguez seemed to reinforce market concerns when he told a Venezuelan radio station in Caracas that ``it's possible oil prices won't fall as much as they should.''

Governments and consumers in many oil-importing nations have reacted with concern and anger as fuel prices have tripled in less than two years. In France, taxi drivers and truckers blocked roads last week to protest gasoline prices, while motorists in Belgium and Germany and farmers in Britain mounted similar, if smaller, efforts to disrupt traffic. Many Americans worry that low inventories will cause a spike in heating oil prices this winter.

``The reason for the recent rise in fuel prices is to do with the rise in world oil prices. The sensible way, the only right way to deal with this problem, is to put pressure on OPEC,'' said British Prime Minister Tony Blair.

For its part, OPEC blamed speculation and high fuel taxes in Europe for much of the firmness in prices.

In an official statement, OPEC expressed its ``dismay'' that European governments seemed unwilling to reduce their fuel taxes to help ease the problem. Lukman said he had met earlier Monday with three representatives from the European Union to discuss the issue.

Saudi Arabia, OPEC's largest producer and exporter, led the push for an increase in output. The Saudis argued initially for boosting daily the target by 1 million barrels. Other OPEC members opposed an increase of that size, and the group compromised at 800,000 barrels.

``This is our best assessment of what the market needs now,'' Saudi Arabian oil minister Ali Naimi said. ``It will improve and moderate the price, and if it doesn't we have a mechanism to trigger some more.''

In Washington, the U.S. government gave Saudi Arabia credit for the OPEC move but said it is too early to know what effect it will have on inventories and prices.

The new agreement does not include Iraq, which exports its oil under a system monitored by the United Nations.

Leo Drollas of the Center for Global Energy Studies in London said the increase was the minimum necessary to gradually replenish U.S. inventories of crude. But while prices for crude may start to stabilize and even fall, heating oil prices are likely to stay high, he said.

``This agreement is doing nothing for U.S. consumers, nor could it have been expected to given the tightness in the home heating oil market in the U.S. and the refineries' lack of capacity,'' he said.

Refineries are working almost at full throttle to produce heating oil already, and it will take at least 45 days before any new barrels of crude can reach consumers in the form of heating oil.

``Just pray for a warm winter,'' he said.