Oil Cartel to Hold the Line on Output

OPEC ministers agreed Tuesday to leave the cartel’s oil production unchanged for at least a month, a move that could stall the recent drop in U.S. gasoline prices and even send prices back up to record highs, analysts said.

The Organization of Petroleum Exporting Countries, satisfied that crude oil prices remain above $25 a barrel, had been expected to leave production at current levels until its next regularly scheduled meeting in September.

But Iraq complicated matters last weekend by shutting off its crude exports in protest of United Nation sanctions against the country, forcing OPEC to decide whether the group’s other members should boost production to make up for the loss.

OPEC, meeting in Vienna, instead postponed any action until it holds an emergency meeting July 3, when it will evaluate the effect Iraq’s cutoff has had on the market for crude oil and gasoline. The 11-member cartel produces about 40% of the world’s oil.

Iraq suspended its oil exports to protest a U.N. decision to extend the so-called oil-for-food program by one month, instead of the usual six, to consider U.S.-British proposals for changing the arrangement. The program, which stems from sanctions imposed on Iraq for its invasion of Kuwait in 1990, allows the country to sell oil to pay for humanitarian goods.

For California drivers, meanwhile, another bump in the energy road has surfaced much closer to home. Chevron Corp. and Valero Energy Corp., which run three of the state’s biggest refineries, warned Tuesday that they may have to cut production if they are not exempted from potential rolling blackouts this summer because of the state’s power crisis.

That also could reverse the recent slide in gasoline prices in California, where refineries have only lately started to catch up with motorists’ strong demand. Analysts have warned that if there is any disruption to those refineries, supplies could again become so tight that prices would surge.

Chevron and Valero said they would have to pare production because the blackout threat would require them to rely on less-powerful backup generators to power refineries. “We don’t have the backup generation to maintain full production,” Valero spokeswoman Mary Rose Brown said.

Valero operates a major refinery in Benicia and Chevron has refineries in El Segundo and Richmond. The companies declined to say how much they might reduce their output, but Chevron said in a letter to Gov. Gray Davis that the cuts “will reduce the availability of critical fuels to the state.”

The companies are seeking an exemption from state regulators, and a bill pending in the state Legislature would require that California’s 17 refineries be among the last electricity customers asked to curtail production.

All of this comes just as gasoline prices are turning lower amid a surprising rise in U.S. inventories. The American Petroleum Institute said late Tuesday that gasoline supplies rose 3.2 million barrels to 209.32 million in the week ended Friday, nearly double analysts’ estimates.

Average prices for self-serve regular gas in California and nationwide fell to five-week lows as of Monday, the U.S. Energy Information Administration said in its weekly report. In California, the average price dropped to $1.931 a gallon from $1.947 the previous week and from its peak of $1.954 reached the week ended May 14.

Commodities markets had a mixed response to OPEC’s action. The price of crude oil for July delivery in New York edged up 11 cents to $28.24 per 42-gallon barrel; gasoline for July delivery slipped 0.23 cents to 90.54 cents a gallon.

One thing appears certain, analysts said: OPEC’s stance isn’t going to help make gasoline cheaper at U.S. service stations. Iraq’s action, if unchecked for a month, could push crude prices higher on world markets. And even if the cartel were to make up for Iraq’s lost barrels, that would merely keep OPEC’s production steady and thus keep crude prices at current levels, they said.

“OPEC decided to punt and continue producing their current level” of 24.2 million barrels of oil a day for the next month, said John Kingston, global oil director for Platts, an energy information firm.

“The status quo is not good news” for American consumers, said Rep. Martin Frost of Texas, chairman of the House Democratic Caucus, noting that OPEC’s current output follows two cuts earlier this year that shaved production 9%, or 2.5 million barrels a day.

But even if OPEC were willing to pump more oil and accept lower crude prices, it still might not help U.S. consumers, Kingston said. That’s because “the refineries in the U.S. already are running close to 100%, and you can’t put any more crude oil through them,” he said. “OPEC looks at that and says, ‘So what’s the point’ ” of exporting more oil to the United States?

Iraq’s move again turned the spotlight on OPEC’s biggest producer, Saudi Arabia, which says it is prepared to lead the cartel to boost production just enough to make up for Iraq’s exports--about 2.1 million barrels a day.

The Saudi oil minister, Ali Ibrahim Naimi, was quoted by Bloomberg News as saying, “I can guarantee that there will be no shortage” if Iraq keeps its oil off the market. And the Saudis, who are key U.S. allies, also are sensitive to the prospect that U.S. political complaints would escalate along with oil prices.

Other OPEC ministers echoed that forecast. “If the situation in July needs more supply, we will increase the supply,” cartel Secretary-General Ali Rodriguez said.

But despite the oil ministers’ comments, some analysts wonder how quickly the Saudis and the rest of OPEC would act to make up for Iraq’s action. That’s because OPEC members, still smarting from the oil glut two years ago that sent crude prices plunging and ravaged their economies, are wary of pumping more oil in case Iraq suddenly changes its mind.

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Times wire services were used in compiling this report.