OPEC Pledge Fails to Calm Oil Markets

Oil markets surged Monday despite a plan by OPEC to pump more crude, and the cartel’s president warned of a looming worldwide energy crisis if consuming nations don’t produce and refine more petroleum.

Meanwhile, high prices of crude oil and chronic refinery problems helped kick the average gasoline price for California motorists to a record of nearly $1.85 a gallon, the Energy Department reported Monday.

“The world is facing a possible energy crisis and OPEC alone simply doesn’t have the power to control it,” said Ali Rodriguez, Venezuela’s minister of energy and mines and president of the 11-member Organization of Petroleum Exporting Countries. “There isn’t a big risk in the short term, but we could see $40 oil if there’s a cold winter.”

Some energy market analysts agree with such predictions, especially if a cold winter hits, and foresee gasoline hitting $2 a gallon. Inventories of gasoline and home heating oil are extremely low, which causes prices to surge with crude oil price increases or even minor production or supply disruptions.

“The hard, cold reality is OPEC may not be able to stop this ball that is rolling downhill,” said Phil Flynn, senior energy analyst with Chicago brokerage firm Alaron Trading. “This could be the beginning of the end for the gas-guzzling generation.”

OPEC agreed Sunday to boost production by 800,000 barrels a day at a time when oil traders are predicting that 1 million to 1.5 million additional barrels are needed to rebuild scant inventories of gasoline and heating oil and to bring oil futures prices down from levels last seen during the Persian Gulf War. Analysts expect only about 200,000 additional barrels to reach market because OPEC members are already pumping more than their formal allotments.

OPEC ministers, defending their third production increase this year at a flurry of news conferences after their meeting in Vienna, said they are ready to boost output again if oil prices do not fall. But the ministers blamed continuing “confusion in the oil market” on bottlenecks in the refining industry, speculation in the futures market and heavy taxes on petroleum products--factors all beyond the cartel’s sway.

The head of an international energy watchdog group said that uncertainties surrounding OPEC’s move may have made the oil market even more volatile, a fear backed up by trading Monday on the oil futures market. The U.S. benchmark price for October contract West Texas intermediate crude rose $1.51 to $35.14 a barrel on the New York Mercantile Exchange.

The world “clearly needs more oil,” said Robert Priddle, executive director of the International Energy Agency in Paris. “The producers say they have set themselves the objective of achieving stability through unilateral market management. So far they have achieved just the reverse,” causing prices to soar in the last 21 months from a $10-per-barrel low brought about by previous OPEC decisions to reduce production, he said.

The upward spiral in oil prices continues to be felt by consumers.

In San Francisco, the average price of self-serve regular gasoline already has cruised into the $2 neighborhood--$2.02 a gallon, to be exact, on Monday--according to the AAA Fuel Gauge Report. By comparison, AAA said, the average price in Los Angeles was $1.69.

Statewide, the retail average for self-serve regular gasoline hit a record $1.847 a gallon, up from $1.79 the previous Monday, the Energy Information Administration said. (Still, after adjusting for inflation, California drivers paid more for gasoline back in 1981. The pump price then was $1.346 a gallon, the equivalent of $2.65 in 1999 dollars.)

Nationwide, the average for self-serve regular rose to $1.56 from $1.53, based on a weekly survey of 800 gasoline stations by the information arm of the Energy Department.

Prices on the gasoline spot market in California began declining late last week, indicating that supply is improving and may begin to bring pump prices down soon, a spokesman for the California Energy Commission said.

Meanwhile, high fuel prices have led in recent days to fuel surcharges for airline passengers and for package and freight shippers, raising concerns about long-term economic effects.

“The big question is what [oil] price is recessionary to the global economy,” said Tyler Dann, a Houston-based senior oil analyst for Banc of America Securities. “Our analysis is indicating that $35 a barrel, sustained, would affect first the Asian economies. That would be worrisome to us.”

OPEC ministers agreed to boost crude oil production again in a matter of weeks if the new increase of 800,000 barrels a day fails to bring down prices when it takes effect Oct. 1, the organization’s secretary-general said Monday.

“We retain the option of putting more oil into the market should the market require it,” Nigeria’s Rilwanu Lukman told reporters at the cartel’s Vienna headquarters.

OPEC can move quickly to raise production as much as 500,000 barrels a day without waiting for the oil ministers’ next scheduled meeting beginning Nov. 12.

“We don’t have to wait until the 15th of November if prices get out of hand again,” Lukman said. “We have an instrument in our hands that we are prepared to activate, or put in place, if prices remain too high.”

OPEC pumps about 35% of the roughly 76 million barrels consumed around the world each day.

On paper, the Oct. 1 increase would raise the cartel’s daily production just over 3% from the current 25.4 million barrels to 26.2 million for the 10 participating nations. Iraq, which is excluded from the quota system, produces about 2.5 million barrels a day under U.N.-imposed sanctions.

Mexico, which is not part of OPEC, said Monday that it will increase oil exports by 200,000 barrels a day, probably during the fourth quarter.

But Lukman conceded to reporters that, outside of Saudi Arabia, the world’s leading producer, some of OPEC’s members will be hard-pressed to increase output because they already are pumping at or near capacity.

Lukman suggested that oil-consuming countries, such as the U.S., should resist any pressure to dip into strategic reserves of crude in order to bring down the price further.

“If they decide to use their strategic reserves to control the market, then that’s their decision. We can’t hold that against them,” Lukman said. “But it would be a misuse of the strategic reserves . . . .

“You see, the danger there is that if they go on using their strategic reserves to control the market, pretty soon they’ll run out of strategic reserves. And when the real crisis comes, they’ll have nothing and we’ll have nothing, and God knows what happens [then].”

Although OPEC’s members try to present a united front in public, they squabble among themselves over whether to increase oil production or cut back. Cartel members are notorious for quota cheating, or as Lukman preferred to call it, “leakage.”

“We have an agreement,” he told reporters, “and everybody is expected to follow it.”

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Watson reported from Vienna and Brooks from Los Angeles.