OPEC Acts to Cut Back Production : Higher Gas Prices Seen as ‘Hawks’ Prevail at Meeting
In a triumph for the “hawks” within OPEC, the cartel’s oil ministers agreed Saturday on a tighter-than-expected production plan that could nudge prices to the $20-$22 per barrel range and further strengthen OPEC’s hand on the world energy scene.
The Organization of Petroleum Exporting Countries decided to produce 9% less crude oil in the fall than it previously had planned, a step that will tend to constrict supplies and thus bolster prices. Some economists predicted that that will set the stage for official OPEC price increases in December of $2 per barrel.
The cartel extended its fixed, take-it-or-leave-it price of $18 per barrel for the rest of the year. But the price of non-OPEC crude oil will probably spurt immediately, as oil traders react to the news of OPEC’s agreement. Analysts said that U.S. gasoline prices might climb a nickel per gallon, or 5%, by Labor Day.
Cheating by Members
Taking into account the usual cheating by some OPEC members who pump more oil than they are supposed to, analyst Sanford Margoshes of Shearson Lehman Bros. said the cartel will be producing 600,000 fewer barrels a day than the market needs in the fourth quarter. Oil companies will get the extra oil from storage.
“The fourth quarter should see a perceptible reduction in inventories and a significant buoying up of the market that will pave the way for a rise in official prices to $20 at their December meeting,” Margoshes said.
By the time OPEC raised its official prices, the prices for non-OPEC oil would already be higher because of tightened world supplies, enabling the cartel to say it was only following everyone else.
Aim to Avoid Criticism
“They want the official price to lag the spot price so OPEC won’t be criticized for leading prices up,” said Joseph Rault Jr., president of Rault Resources, a New Orleans oil and gas company, who was observing the OPEC meeting. “Of course, they’re creating the higher price by restricting production.”
An official OPEC price of $20 a barrel, an average for eight types of OPEC crude, would mean a price of about $21.50 for the most commonly quoted crude oil in the United States, called West Texas Intermediate. The mere anticipation of an OPEC accord drove West Texas Intermediate up 71 cents a barrel to $20.35 Friday on the New York Mercantile Exchange.
Economists said the inflationary impact will be moderate, while the action will be welcomed by the oil community. Oil producers were hard hit by the oil glut of 1986 that drove crude oil prices from $30 to as low as $9 per barrel.
But the long-term effects of the unity displayed by OPEC’s disparate members, after a period of disarray that culminated in the price collapse, might be more significant than the details of the latest agreement.
“Two dollars a barrel is not that dramatic. But it fixes in people’s minds the idea that oil prices are rising from here on out,” said Fergus MacLeod of the London brokerage firm Barclays.
‘It’s the New OPEC’
Crowed Arturo Hernandez Grisanti, the Venezuelan oil minister, “It’s the new OPEC. We are now strong and united.”
At a press conference, Nigerian Oil Minister Rilwanu Lukman, OPEC’s president, said: “We expect prices to continue to firm with this agreement.”
Subroto, the Indonesian oil minister, said the agreement is designed to avoid creating an oil glut that could push down prices.
Specifically, with a minimum of acrimony during a brief three-day mid-year meeting at its heavily guarded headquarters here, OPEC decided to scale back to 16.6 million barrels per day the planned output in October through December.
Previously, expecting a rise in demand that so far has not materialized, the cartel had scheduled fourth-quarter production of 18.3 million barrels a day. Economists and OPEC’s own experts now say that would be too much oil, causing prices to tumble.
As previously planned, output for the third quarter was affirmed at the same 16.6 million level. Because demand normally rises around this time of year, the second-half production ceiling is 800,000 barrels higher than in the first six months of the year.
Price Raised Since December
The production quotas and fixed official price of $18 a barrel were set by OPEC last December, a plan that has been closely adhered to by most OPEC members and succeeded in raising prices from the $13-$14-per-barrel range for various grades of OPEC crude oil.
Remaining outside the production agreement is Iraq, which has rejected as too small the quota assigned to it by the rest of the cartel. Iraq’s overproduction, expected to rise sharply with the completion of a new pipeline this fall, remains a problem for OPEC.
Some skeptics believe the scheduled hike in Iraq’s production to about 1 million barrels above its theoretical quota, along with increased opportunities to cheat as customers look harder for oil in a tighter market, will tend to hold prices steady.
“I think everyone will be surprised how much leakage there is,” said Paul D. Mlotok of the Salomon Brothers investment firm, referring to unauthorized production.
OPEC’s continued production restraint suggests an increased strategic emphasis on raising prices--an approach favored by hard-liners Iran, Libya and Algeria. By contrast, the cartel’s leading moderate members, especially Saudi Arabia and Kuwait, recently had stressed the need for stable prices.
Relaxed Conservation Efforts
The premise of the more gradual approach is that the world would further relax its energy conservation efforts, oil consumption would rise, and production of non-OPEC oil would fall, creating a growing market for OPEC oil and renewed dominance by the cartel in a few years.
The reluctance of such members as Saudi Arabia and Kuwait to trim production and raise prices might have been overcome by the recent erosion of the dollar, the currency in which all oil is traded, analysts said. By one estimate, a barrel of oil priced at $18 last December is worth only about $16.80 in world trade today.
Despite the eagerness to bolster prices now, OPEC observers still expect only a gradual rise over time as opposed to the dramatic upward spikes in prices that characterized the 1970s. That could change quickly, however, with an interruption of oil shipments because of military actions in the Middle East.
The main loser in Saturday’s decision appeared to be Kuwait, which wanted a big increase in its quota to take advantage of its large unused oil-producing capacity. But tiny, oil-rich Kuwait has been aiding Iraq financially in its war with Iran and has presumably been intimidated by Iranian attacks on its tankers and the mining of its oil-export harbors.
“They’re less likely to take an extreme stand when there are Iranian mines bobbing about near their export terminal,” said analyst MacLeod.
Apparently to appease Kuwait, OPEC set up a committee that could recommend an increase in production if the quotas approved Saturday served to drive prices up “significantly.” No details of that plan were made public.
Meanwhile, Iran and Iraq both won--Iraq by remaining free to produce as much oil as it can and Iran by the prospect of higher revenues despite its physical inability to increase oil production.
