Mexico Follows OPEC in Oil Production Hike

MEXICO CITY — Flexing its growing muscle as a world oil player, Mexico took the lead among non-OPEC producers Wednesday by committing to raise output in line with the supply hike adopted by the Organization of Petroleum Exporting Countries and thus ease pressure on global oil prices.

Mexico’s decision, along with OPEC member Iran’s belated and grudging agreement to go along with production increases announced Tuesday by a majority of the cartel’s members, spurred a plunge in crude oil prices for the second day in a row.

The slide in crude oil won’t provide much relief at the gas pumps in the short term, but it was welcome news for analysts who had raised the specter of gas shortages this summer without production increases to fill badly depleted reserves.

In all, the production increases announced by OPEC and Mexico will restore about 1.85 million barrels a day to global markets. Cuts by OPEC of 4.3 million barrels a day since early 1998 had spurred a nearly threefold rise in crude oil prices, from historic lows near $10 to a nine-year high of $34.13 on March 7. Gasoline prices rose sharply in step, reaching record U.S. and California highs, not accounting for inflation, and spurring forecasts of $2 a gallon.

At a White House news conference, President Clinton praised OPEC’s decision as “good news for our economy and for the American consumer” and urged oil companies “to bring the savings to consumers as quickly as possible.”

He said the production increases would “bring relief to hard-pressed truckers in this country, who have been especially hard-hit, and others who have high fuel costs, by providing a greater balance between oil production and consumption.”

The U.S. government had lobbied hard for greater production to ease pressure on prices. But that lobbying effort almost backfired.

Iran, OPEC’s second-largest oil producer after Saudi Arabia, cited U.S. pressure as a major reason it initially declined to go along with the rest of the cartel. But in Vienna on Wednesday, Iranian OPEC representative Hossein Kazempour Ardebili said his country would start pumping an additional 264,000 barrels a day as early as Saturday rather than risk losing sales. Ardebili told reporters: “I will not give up my market share for anyone.”

Mexican Energy Minister Luis Tellez, who was among the architects of the production cutbacks last year that sent prices for crude oil soaring, had argued strongly in recent weeks to restore production to ease prices.

At a news conference in Mexico City, Tellez announced a 150,000-barrel-a-day increase in Mexican oil exports, equal to a 4.6% rise in crude production and a nearly 10% increase in exports.

“We have had very close contact and we have maintained a very close consensus with members of OPEC” during the last few weeks of intense negotiations of the production increase, Tellez said.

Mexico, the world’s seventh-largest oil producer, pumps just over 3 million barrels a day, half for domestic consumption. Most of the 1.5 million barrels it exports go to the United States.

At the OPEC meeting in Vienna, nine of 11 members agreed to raise output by 1.45 million barrels a day, but Iran balked at first (production by Iraq, the 11th member, has been governed by a separate United Nations measure since the Gulf War).

Tellez said higher world oil production would help balance producers’ needs for fair prices with the market stability required for sustained world economic growth.

“Since the moment prices took off at the start of this year, Mexico consistently argued for a sufficient oil supply that would permit growth of the world economy,” Tellez said.

Eduardo Lopez, Latin American energy analyst for Petroleum Finance Corp. in Washington, said Mexico’s public pledge last month to raise production “forced OPEC to consider its own hike.”

“So Mexico is somehow driving the organization,” he said, “not necessarily leading it but making the organization confront a challenge.”

One reason for Mexico’s influence is that it is one of the three major oil exporters to the United States, along with OPEC members Saudi Arabia and Venezuela.

“Both of them have to be sure that the U.S. market share is stable,” Lopez said. “They cannot let Mexico grab market share.”

Lopez noted that Iran’s public expression of dissatisfaction with the production increase “is very telling about the tensions with the organization” and should dispel notions of cohesion within OPEC.

George Baker, who publishes the Mexico Energy Intelligence newsletter in Houston, said the latest accords on higher production suggest a “virtual OPEC” that includes Mexico and Norway.

“We’re not in a post-OPEC period--we’re just in a new OPEC period which has a virtual membership,” he said.

But he noted that Mexico has to play two difficult cards: “One is its membership in the new virtual OPEC; the other is its role as an ally and client of the United States. Those two roles are opposed to each other.”

Indeed, at the news conference Tellez testily defended the decision as being in Mexico’s sovereign commercial interest, and not a concession to U.S. interests. Mexico is extremely sensitive to any perceived interference or pressure from the United States.

Alan Struth, manager of petroleum market analysis for Honeywell Hi-Spec Solutions in Houston, said oil prices were coming down even before the production increase, from an average $30 in March to a projected $26.50 in April. His year-end forecast is for $22 a barrel for West Texas intermediate crude, the U.S. benchmark, which fell 64 cents to close at $26.45 Wednesday on the New York Mercantile Exchange.

A key issue, he said, will be whether refineries start ramping up production in April and beyond.

Times staff writer James Gerstenzang in Washington contributed to this report.

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Giving It Back

Near-term crude oil futures in New York slipped Wednesday to the lowest price since mid-January, in the wake of OPECs decision to boost production. Weekly closes and latest, as well as the nine-year high price of $34.13 a barrel reached March 7:

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March 7: $34.13

Wednesday: $26.45

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Source: Bloomberg News * CASHING IN

Biggest winners in OPEC’s decision to boost output may be oil companies. C4