OPEC Cut Causes Barely a Ripple in Marketplace
Trying to shore up prices, OPEC leaders agreed Friday to slash oil production by more than 6%. But analysts raised doubts about whether OPEC can make the planned cutbacks stick or whether consumers, particularly in California, will feel any major effects.
Still, analysts said gasoline prices in the Los Angeles area and throughout California--which have fallen below $1 a gallon in some places--are likely to rise in coming weeks and months, in line with a recent pickup in wholesale market prices and with the customary increase nearly every spring.
The decision by oil ministers of the Organization of the Petroleum Exporting Countries to cut production by 1.5 million barrels a day, made at an emergency meeting in Cairo, produced barely a ripple in the marketplace.
In fact, the price of February crude oil futures fell 49 cents to $20.41 a barrel in trading on the New York Mercantile Exchange, the second straight decline after surging $1.65 on Wednesday. Industry analysts said the OPEC decision, widely anticipated after weeks of negotiations, already was factored into oil market prices.
Experts said the course of oil prices in coming months will hinge largely on whether the economic recovery comes and triggers increased demand for energy. In addition, they said prices will be influenced by whether OPEC can enforce the planned production cuts among its 11 member countries and among other major oil producers outside OPEC, particularly Russia.
“What OPEC says and does may be different,” said Ashmead Pringle, president of GSC Energy, an energy trader and brokerage based in Atlanta.
Californians, who have enjoyed falling gasoline prices over the last year, are somewhat further shielded than most other Americans from OPEC’s production decision. Analysts note that little OPEC oil comes into the state and, probably more important, that California’s own refining output and environmental requirements play a pivotal role in dictating pump prices here.
According to the Oil Price Information Service, a Lakewood, N.J.-based firm, the average pump price for a gallon of regular gasoline in Los Angeles County earlier this week was slightly less than $1.01. That’s down from $1.57 in December 2000 and the lowest in the eight years for which comparable figures were available.
Despite the skepticism about whether OPEC has the clout to boost oil prices in a weak economy, the organization’s moves remain closely watched. Many economists are counting on continued low energy prices to help lift the U.S. economy out of its current recession.
An economic analysis released Friday by investment firm Goldman, Sachs & Co. predicted a stronger than previously forecast national recovery this spring, fueled in part by low energy costs that are expected to free up consumer spending. If OPEC’s production cut were to succeed “in driving up prices a lot, it would be an obstacle to recovery, but that seems unlikely,” said William Dudley, a Goldman Sachs economist.
At their emergency meeting, OPEC oil ministers called for production cuts to begin Tuesday and to continue for at least six months. The formal decision to reduce production, which was agreed to in principle last month, followed talks to extract a commitment from non-OPEC members to slash output by nearly 500,000 barrels a day.
The aim was to prevent a price war between OPEC members and the other major oil producers--including Mexico, Norway and Russia--and to force the nonmember nations to share the effects of new production cuts.
“The main task for us at this moment is the stabilization of the market,” OPEC Secretary General Ali Rodriguez told a Cairo news conference.
Experts said, however, that Russia, the world’s No. 2 oil producer after Saudi Arabia, could undermine the pact between OPEC and other producers. Russia agreed to curb output for only three months, not the half year sought by OPEC.
“Russia isn’t necessarily going to play ball,” said Peter Navarro, a UC Irvine business professor who specializes in energy issues.
Navarro added that OPEC for years has been undermined by members that violate stated production targets. “Historically, you have OPEC plagued by cheaters, the Libyas, the Iraqs, the Irans of this world, which have a very different need for oil revenues than the Saudis and the Kuwaitis.”
OPEC, which before Friday’s decision had trimmed production this year by 3.5 million barrels a day, has set a minimum target price of $22 a barrel. The cartel accounts for about one-third of the world’s oil production.
Since hitting a peak of $37.80 a barrel on the New York Mercantile Exchange in September 2000, oil prices generally continued downward until they hit a low of $17.12 in the middle of last month. Pringle said the OPEC negotiations that led to Friday’s decision have helped lift prices since then. He predicted that the onset of colder weather and an improving economy will push prices back up around $25 a barrel in coming months, but neither Pringle nor most other analysts expect a sharp increase, if any, in the immediate future.
Still, gasoline prices in Southern California may have hit bottom and be on the verge of heading back up. Analysts said that reflects a modest increase in wholesale oil prices in recent weeks and possibly declining gasoline inventories. In addition, prices tend to pick up early in the spring in anticipation of more motorists taking to the road later in the season and in the summer.
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Associated Press was used in compiling this report.
