Summer driving may delay relief at pump

Thursday, June 22nd 2000, 12:00 am
By: News On 6

Record-high gasoline prices aren't expected to ease anytime soon, even after OPEC agreed Wednesday to boost crude oil production by about 3 percent.

The increased production by the Organization of Petroleum Exporting Countries should eventually bring crude oil prices down, but gasoline prices probably will remain high for some time, with the peak summer driving season at hand, energy analysts warned.

"The problem here is that we're in the summer," said industry analyst George Gaspar of Robert W. Baird & Co. Inc. in Milwaukee. "We've got this tremendous surge in gasoline demand here in the United States, up 5, 6 percent. It's unbelievable what's going on in gasoline demand. We've got to get through summer."

OPEC's move came as Texas motorists got a fresh reminder of how high that soaring demand has boosted prices.

The American Automobile Association-Texas reported Wednesday that the price of gasoline in the state was up 43 percent from a year ago. In its survey taken Tuesday, a gallon of unleaded regular gasoline averaged $1.511 across the state, up from $1.058 in June 1999.

In Dallas, a gallon jumped from $1.086 last year to $1.559 now.

OPEC oil ministers meeting in Vienna, Austria, voted to increase the group's daily quota by 708,000 barrels. It was the second time in three months that the cartel agreed to increase output in response to consumer nations' complaints about prices.

Analysts questioned the actual increase in supply because OPEC members already were producing more than their stated quotas.

"The real key to the whole thing is how much additional volume shows up on the market," said economist Alan Struth of Honeywell International Inc. "All they've done right now is legitimize the current production level."

Traders also discounted the effects of OPEC's vote, bidding up the price of oil futures on most exchanges. The benchmark U.S. crude, West Texas Intermediate, climbed 72 cents Wednesday on the New York Mercantile Exchange to close at $31.37 a barrel.

Mr. Struth estimated OPEC production at 28 million to 28.5 million barrels, which is sufficient for demand.

"Even with the new quota and [when] you work in a number for Iraq [an OPEC member not part of the quotas] ... you're probably not talking about a lot more barrels showing up," Mr. Struth said.

Reflecting reality

"What they've effectively done is formalized the cheating that was going on in the market," said analyst Raad Alkadiri of Petroleum Finance Co. in Washington, D.C.

"If you're looking at it in terms of the U.S. gasoline market, it's not going to provide a tremendous amount of respite," Mr. Alkadiri said. However, he said, the high prices now are as much a result of market forces in early 2000 as today's crude oil prices.

Mr. Gaspar estimated that the OPEC members were producing about 600,000 barrels more a day than the official quotas adopted in March. Mr. Gaspar said he expected OPEC members to exceed the new quotas by 500,000 barrels, giving the world markets about 600,000 barrels more than they had been receiving.

One thing constraining any bigger increases, Mr. Gaspar said, was the growing inability of some OPEC members to boost production.

"I think there's a tremendous amount of sensitivity to raising OPEC's quota beyond what it is. Several of these countries may get found out, so to speak, that they are at capacity. One of these next meetings the Saudis are going to say, 'Let's recut the quotas because some of you countries can't produce it anyway,'" Mr. Gaspar said.

Even with the smaller increase approved Wednesday, "I think some of them are going to really struggle to get to these levels," he said.

Mr. Struth offered some hope that gasoline prices may start declining. Refinery production figures indicate that gasoline yields are finally going up, and crude oil prices should start declining. Right now, the spread between the price of oil and gasoline is unusually high, and that margin should begin narrowing, also bringing gasoline prices down, he said.

"I would hope in a month that things will look a lot better," he said.

In its official communiqué, OPEC said it raised the quotas "taking into consideration the situation currently prevailing in the market, however, and in order to respond to consumer concern over price levels and the organization's own wish to moderate prices."

"Extremely high prices could have a negative effect on demand, so we are worried about that," OPEC Secretary General Rilwanu Lukman told reporters.

Most drivers unfazed

Most U.S. motorists have already shrugged off the higher prices as they prepare summer travel plans, AAA-Dallas district manager David Wainstein said. "Certainly everyone is concerned about the rising prices. But we're not experiencing any slowdown in activity," he said.

"What we have seen is people cutting down the number of trips they take. If they had been planning to take three long car trips this summer, now they may decide to only take two," Mr. Wainstein said.

The Associated Press contributed to this report.