Oil Prices Plunge 13%; Some Resist OPEC Cuts

Oil prices slid 13% Thursday amid heightened chances of an all-out price war as major producers Russia and Norway ignored OPEC’s call for production cuts to stabilize the world crude market.

Saudi Arabia warned that prices would collapse unless non-cartel members agreed with the Organization of Petroleum Exporting Countries to cut output by a total of 2 million barrels a day. Kuwait Oil Minister Sheik Saud al Sabah told Reuters on Thursday he would not be surprised to see prices as low as $10 a barrel.

In what is viewed as a supreme test of its waning powers to dictate global oil prices, OPEC is gearing up to defend its declining market share at all costs, even if it means producing a global energy glut, analysts said.

Chances are remote that both sides will agree to production cuts.

“Prices will continue to fall for some period in the future. The market, not OPEC, is controlling what’s going on,” said Doug Bohi, vice president of economic consulting firm Charles River Associates in Washington.

December crude oil futures plunged $2.29 in New York to $17.45 a barrel, the lowest price since June 1999.

The brewing energy war is good news for California consumers. The average statewide price of regular unleaded gasoline fell to $1.37 a gallon Monday, the lowest this year. Barring an unexpected refinery closure or accident, the California Energy Commission said it expects prices to continue falling.

Prices of oil and refined products have been under pressure much of this year as the global economic slowdown, and then the Sept. 11 attacks, hurt the outlook for future energy sales--and thus prices.

OPEC has responded by cutting 3.5 million barrels, or 12%, from its daily production so far this year. Amid continued price declines, OPEC said this week it would cut an additional 1.5 million barrels only if major non-cartel producers such as Russia, Norway and Mexico reduce production by 500,000 barrels.

Russia, the world’s second-largest oil exporter, has raised production more than 10% this year.

“OPEC wants to force Mexico, Norway and Russia to become closet members of the cartel. They are drawing the line in the sand and saying you better get over to this side or you will be sorry,” said Adam Sieminski, oil analyst with Deutsche Bank in Baltimore.

Saudi Arabia Oil Minister Ali Ibrahim Naimi warned that, although a price collapse would hurt all oil producing countries including his own, the economic effect would be less severe in OPEC countries because their members’ cost of production was lower.

Some analysts think a continued decline in prices will force producers to follow Mexico to the bargaining table to halt revenue losses.

“Based on conversations I’ve had with key government officials and most of the independent oil-producing countries, I think [OPEC members] are likely to have sufficient commitments well before January to enable them to go forward with their production cuts,” said Ed Morse, an analyst with Hess Energy Trading.

Others such as Ryan Zorn of Simmons & Co. investment bankers in Houston expect OPEC and non-cartel members will “come together and at least talk about cooperation, not letting crude fall below $15 a barrel without talking it back up.”

As of Thursday, only Mexico had responded to OPEC’s call with a significant cut, promising to lower its current 1.5 million barrels of exports by 100,000 on Jan. 1.

Russia had offered an insignificant reduction of 30,000 barrels while Norway’s position is that it is monitoring the situation.

“What’s better math for Mexico? 1.5 million barrels at $10 a barrel or 1.4 million barrels at $20 a barrel? Big difference between $15 million a day in oil sales and $28 million,” said Deutsche Bank’s Sieminski.

Others say the price decline may last longer and go deeper because the crude market now is less subject to monolithic control by state-run oil companies.

Moreover, Saudi Arabia is leery of further production cutbacks without a firm deal from non-cartel producers to match them because doing so would mean further loss of market share and influence, Sieminski said.

“Whether you are selling cars, newspapers or oil, the less you utilize your production capacity, the greater the level of desperation you feel to make your next sale,” he said. “And if your competitors are in the same shape, it only increases the level of competition.”