OPEC Cuts Expected to Extend Pain at the Pump

OPEC surprised energy markets Tuesday by slicing production targets, leading analysts to a not-very-surprising prediction: Consumers should expect little relief from high oil and gasoline prices.

In an effort to keep oil prices from slipping in the coming months, ministers of the Organization of the Petroleum Exporting Countries agreed to pull 2.5 million barrels of oil a day from world markets beginning April 1. That amounts to about 9.5% of the oil cartel’s current production of more than 26 million barrels a day.

Crude oil prices jumped in response in world markets.

The March contract for West Texas intermediate crude, the U.S. benchmark grade, rose Tuesday for the second day in a row, gaining $1.04 to $33.87 a barrel on the New York Mercantile Exchange. The price has averaged $31.11 a barrel in the last year because of increasing demand and problems with supply.

Higher oil prices coupled with news of more refinery problems caused West Coast spot gasoline prices to jump Tuesday, trading as high as $1.24 a gallon in Los Angeles, the Oil Price Information Service reported. That wholesale price doesn’t include taxes, distribution costs and dealer profit, which together can add more than 50 cents a gallon to the total.

Gasoline prices have soared in California in the last six weeks because of rising crude oil prices, market speculation and preparations for the state’s switch to summertime fuel.

The statewide average cost of self-serve regular gasoline was $1.821 a gallon on Monday, according to a weekly survey by the federal Energy Information Administration, the statistical arm of the Energy Department.

The California average has jumped 22.6 cents a gallon since the beginning of the year. At this time last year, the average price per gallon was 6.9 cents lower.

Motorists should expect more of the same in the next few months, said David Hackett, president of industry consultant Stillwater Associates in Irvine.

“Do I see any hope in sight for lower gasoline prices? No,” Hackett said.

Analyst James Burkhard made a similar forecast for oil.

“It’s very likely prices could stay high for the rest of this year,” said Burkhard, director of oil market analysis at Cambridge Energy Research Associates.

OPEC’s 11 members “all have a mutual interest in keeping oil prices high,” Burkhard said. The reason to cut production “is concern about oil prices falling in the second quarter.”

Cartel ministers, meeting in Algiers, agreed to lower official daily production quotas by 1 million barrels and to eliminate cheating on those official quotas to the tune of 1.5 million barrels. OPEC’s quota system limits 10 of its members, not including Iraq, to daily production of 24.5 million barrels, but the member countries often pump more than their official allotments.

OPEC member Saudi Arabia, the world’s largest producer, said action was needed to prevent a price crash as demand slows and world oil inventories build after the Northern Hemisphere winter.

“The inventory, where it is now, is fine; we don’t want to see it building,” Saudi Oil Minister Ali Ibrahim Naimi told Reuters news service. “We don’t want to see a precipitous fall in prices.”

OPEC’s decision marked the second time in five months that the group agreed to reduce production levels as it attempts to keep prices above its official target range of $22 to $28 a barrel. The price is based on a “basket” of seven crude oil grades and has exceeded the upper end of the range since November.

The cartel said it would re-evaluate production levels at its next meeting March 31.

Former Iraq Oil Minister Issam A.R. Chalabi, interviewed at an oil industry conference in Houston, said he was “a bit surprised to see them cut production.”

“But that does not necessarily mean there will be less oil. I think the cheating will continue,” said Chalabi, chairman of Baghdad-based Al Sanam Petroleum & Economic Consultancy Co.

OPEC’s move prompted U.S. Energy Secretary Spencer Abraham to declare that markets should be allowed to operate on their own.

However, he added, cartel members “should be careful that their actions don’t hurt the U.S. and world economies.”

“OPEC will obviously make its own decisions. The United States is not going to go around the world begging for oil. That’s not our policy either,” Abraham said in an interview on CNBC.

Treasury Secretary John W. Snow issued a strong warning to OPEC, saying any reduction in the cartel’s oil output would be “regrettable.” The price increase is, in effect, a tax on American consumers, he said, speaking to reporters in Florida.

Snow said energy costs were not as significant a percentage of U.S. economic output as in the past, but he added that “energy price increases are certainly not welcome.”

Times wire services were used in compiling this report.