www.guardian.co.uk Wednesday March 12, 2003 The Guardian

42%

The amount by which Venezuela's economy is set to shrink in the first quarter, because of the collapse of oil production and the lack of foreign investment, according to a new survey by the Venezuelan subsidiary of the Spanish bank BBVA. The country has been hit by a crippling general strike and has seen mass protests against the authoritarian leftwing president, Hugo Chavez, in recent months.

· Spotted in the Financial Times, March 1

www.nytimes.com By NEELA BANERJEE

IENNA, March 11 — The Organization of the Petroleum Exporting Countries decided at its meeting here today to maintain oil output at current levels, indicating that it could do little else to cope with the uncertain effect a possible war in Iraq could have upon supplies from the Persian Gulf and global demand.

At its last meeting in January, OPEC raised production levels to 24.5 million barrels a day. But industry analysts say OPEC is producing more than that, with nearly all countries, except Saudi Arabia, pumping at maximum capacity to calm a market shaken the last few months by export shortages from Venezuela and jitters over war.

The president of OPEC, Abdullah bin Hamad al Attiyah of Qatar, acknowledged that although the 10 voting OPEC members were taking a wait-and-see approach, the group was prepared to act quickly to produce even more oil within weeks to prevent supply shortfalls and steep jumps in prices.

"We will closely monitor market developments," Mr. Attiyah said at a news conference after the meeting, "and take prompt and appropriate action as and when the need arises."

OPEC does not disclose its actual production. Mr. Attiyah and others would say only that the group's excess production capacity is two to four million barrels a day above the official quota. It is unclear how much of that has already been tapped, though most industry analysts estimated that perhaps only a million barrels a day of spare capacity remained within OPEC, nearly all of it in Saudi Arabia. There is negligible spare capacity outside OPEC, analysts said.

OPEC scheduled an extraordinary meeting for June 11, to be held in Doha, Qatar, rather than at its Vienna headquarters. But Mr. Attiyah said that if war in Iraq touched off an emergency in oil markets before June, OPEC members would confer by telephone or convene another meeting.

Right now, OPEC's most obvious challenge is an oil price that is so high that it could cripple the global economy and weaken demand. Crude oil for April delivery closed at $36.72 a barrel on the New York Mercantile Exchange, an increase of 42 percent from four months ago, when the general strike in Venezuela began and its oil exports were suspended.

Mr. Attiyah said that while OPEC was doing all it could to rein in high prices, the trend was essentially out of the group's control. He and other oil ministers said there was enough oil on the market, but that prices had been buoyed by fears of war, which added a premium to the price of oil that OPEC members have estimated as $5 to $8 a barrel.

"The price today is being driven more by psychological forces," Mr. Attiyah said. "I wish we had the power to freeze prices at $25, but it is out of our hands."

Industry analysts said that OPEC was reaping a volatility in oil prices born of its aggressive cuts in output throughout 2002. "Prices are driven by fundamentals that were created over a 12-month period," one senior oil trader who insisted on anonymity said, explaining that low commercial stocks of oil and petroleum products in the United States were a result of OPEC's export reductions last year.

"It's very good to have a management system to bolster prices, but it can get out of hand, and it did get out of hand," the trader said.

If prices are rising beyond OPEC's control, the only other way to halt an upward spiral would be for Europe, Japan and the United States to release oil from their strategic stockpiles, which total about one billion barrels. But OPEC and the United States both indicated today that such a decision remained distant and would be made to address an oil shortage, not a run-up in prices.

United States Energy Secretary Spencer Abraham, who was in Vienna this week to talk to officials at the International Atomic Energy Agency, met late today with the Saudi oil minister, Ali al-Naimi, and later praised OPEC.

"If OPEC would cover any shortage, we would welcome that," Bloomberg News reported him as saying. "We will only draw on the Strategic Petroleum Reserve if there is a severe supply disruption."

While prices have remained stubbornly high despite OPEC's efforts, the group fears that they could fall rapidly and far too steeply, depending upon what happens in Iraq. And OPEC must be ready for that possibility, its members said. If a war in Iraq is brief, and there is little damage to its oil sites and only a short suspension of its exports, the nervousness in the oil markets could fade and prices could decline.

Some members worry that such a decrease could be accelerated if demand for oil falls about two million barrels a day in the second quarter, as has historically occurred. But OPEC has little choice but to wait to react to such a trend, rather than try to head it off. "There is no doubt that demand in the second quarter will fall," said Chakib Khelil, Algeria's minister of energy. "In a normal situation, we would lower supply. But this isn't a normal situation."

www.nytimes.com

he particulars of their individual stories vary, but in recent years all five Andean nations of South America have suffered crippling bouts of political violence and instability. President Gonzalo Sánchez de Lozada's hasty escape from his presidential palace in Bolivia last month — he hid in an ambulance to flee a riot — was only the latest indication of just how tenuous democracy's hold is on the region.

Washington policy makers should approach the Andean region as a whole and work alongside other Latin American nations, like Brazil and Mexico, to strengthen democracy in the region. Too often in the past, America's approach has been scattershot.

Colombia, the third-largest recipient of American foreign assistance, is a case in point. Under Plan Colombia, the Bush and Clinton administrations have poured billions of dollars into fighting that nation's drug trafficking, which finances violent left-wing guerrilla groups and right-wing paramilitaries. The effort is now starting to reduce coca cultivation, but there are signs that such farming is merely shifting to neighboring countries.

Meanwhile, Colombia's guerrillas recently killed one American contract employee and kidnapped three others involved in the antidrug effort. The Bush administration has sent in 150 more military personnel to assist in the search for them, raising the alarming possibility that Americans could become directly engaged in the conflict.

Colombia, a nation where democracy and brutal civil warfare have tenuously coexisted for decades, deserves our support. But Colombians must do their own fighting, and American aid must remained conditioned on the Colombian military's respect for human rights.

Elsewhere, the region is disillusioned with the last decade's free-market reforms. Too often twisted into a corrosive form of crony capitalism, the "Washington consensus" did little to improve living standards or alleviate poverty. The economic disillusionment has devalued the appeal of democracy as a form of governance and empowered once-marginalized political forces.

In Venezuela, a country of great strategic importance given its vast oil reserves, a demagogic president, Hugo Chávez, has shown that a populist backlash can be as destructive as corrupt political establishments that pay lip service to free markets. Encouragingly, Presidents Alejandro Toledo of Peru and Lucio Gutiérrez of Ecuador appear inclined to follow a more responsible middle course.

Their challenge is to please international capital markets and internal demands for a more equitable distribution of national wealth, and to do so simultaneously and at a difficult economic moment. America needs to be sympathetic, providing aid and promoting trade, but without being an overbearing pitchman for any one set of economic policies.

www.zwire.com ASSOCIATED PRESS March 11, 2003

VIENNA, Austria (AP) - OPEC members agreed Tuesday to stick with their current crude oil production quotas but pledged to boost output in the future to keep supplies flowing in case of any serious disruption.

Representatives of the Organization of Petroleum Exporting Countries ruled out formally raising output now as a way of reassuring nervous markets before any U.S.-led attack on Iraq.

However, they took extreme care not to mention such a conflict as a likely source of disruption, apparently afraid of seeming to support such a war simply by preparing to respond to its possible impact on markets.

Despite sharply higher oil prices, OPEC members argued that the world has enough crude to meet demand and blamed Middle East tensions for causing fears of a possible shortage.

"We are studying the market and keeping abreast of it," Saudi Arabian oil minister Ali Naimi told reporters. "There is no shortage of supply, the market is in balance, there is plenty of oil and there is a commitment to do our best within our capabilities, which we think are enough to satisfy any possible 3/8shortage in the market for whatever reason."

OPEC's president, Abdullah bin Hamad Al-Attiyah, confirmed that it was not changing its output target of 24.5 million barrels a day. Delegates planned to meet on June 11 in Doha, Qatar, to review market conditions, he said.

OPEC officials announced their decision after meeting for two and a half hours at the group's headquarters in Vienna, Austria. OPEC pumps about a third of the world's crude.

Markets worry that a conflict with Iraq would halt that country's 2 million barrels in daily exports. The impact on supplies and prices of crude could be more severe if fighting spread beyond Iraq's borders.

"The international political tensions have, without any doubt, reduced OPEC's influence on prices," Al-Attiyah said in a speech to delegates at the start of their meeting.

He added that OPEC must make a plan to cope with "any radical change in market conditions which may result from developments in the Middle East." This was as close as OPEC's official proclamations went to mentioning a war against Iraq, one of its founding members.

Algeria's oil minister Chakib Khelil said the group could produce an additional 2-4 million barrels a day in an emergency. An expected drop in seasonal demand in the spring should also help ease pressures on supply, he said.

However, many OPEC members are already pumping all they can to profit from prices that are near 12-year highs, and it is unclear how much more oil OPEC could produce even if it wanted to.

The U.S. Energy Administration reported last week that OPEC's spare production capacity, excluding Iraq, was no more than 2 million barrels a day. That would give the group just enough extra barrels to cover a disruption in Iraqi supplies but no more.

Bill Edwards, an independent energy consultant from Houston, argued that OPEC has "zero" ability to raise output from current levels.

"I think they're producing all they can of the crude that refiners want," he said.

At least one OPEC oil minister - Obaid bin Saif Al-Nasseri of the United Arab Emirates - acknowledged that it would be difficult for the cartel to cover a bigger supply disruption that included any of Iraq's neighbors such as Kuwait, where thousands of U.S. troops are poised to attack Iraq.

Al-Nasseri's comments on Monday suggested that the United States and other major oil-importing countries might need to rely on their own strategic petroleum reserves. The U.S. alone has a strategic petroleum reserve, or SPR, of 600 million barrels.

"OPEC is working flat out to make sure the market is supplied," said Raad Alkadiri, an analyst at The Petroleum Finance Co., a Washington consultancy.

Alkadiri agreed that the group would be hard-pressed to cover a dual shortfall from Iraq and Kuwait.

"If there are any signs of supply disruptions beyond Iraq's borders, then I think we'll see use of the SPR fairly quickly," he said.

U.S. Energy Secretary Spencer Abraham, in Vienna for an International Atomic Energy Agency meeting, appeared to confirm that view.

Asked at a news conference whether the U.S. government would release oil from its strategic reserves, Abraham told reporters: "We are prepared to act very quickly, but only if we believe a severe disruption of supply exists."

The United States and other major importing countries want OPEC to maximize its production if a war threatens supplies. Abraham planned to meet later Tuesday with Saudi Arabia's Ali Naimi.

April contracts of U.S. light, sweet crude fell 55 cents to close at $36.72 a barrel. At the International Petroleum Exchange in London, April Brent fell 39 cents to close at $33.30 a barrel.

ogj.pennnet.com By an OGJ correspondent

VIENNA, Mar. 11 -- Members of the Organization of Petroleum Exporting Countries agreed Tuesday to maintain their current oil production quotas, ruling out any formal or informal increase in output as a means of calming rattled markets.

Earlier suggestions that OPEC might suspend output quotas altogether were not even discussed during the meeting, said OPEC Pres. Abdullah bin Hamad Al Attiyah.

The decision to keep existing output quotas had been anticipated by some financial analysts. Jefferies & Co. Inc. in New York said Monday, "We expect the cartel to maintain the current production quota of 24.5 million b/d for the OPEC-10 (excluding Iraq) and (to) state that the members will boost production in an effort to replace lost production if Iraqi oil production stops."

At the close of the 1-day meeting, Al Attiyah said OPEC remains prepared to increase production if necessary.

Speaking at a press conference following the 2.5 hr meeting of ministers, Al Attiyah acknowledged that world oil prices are high, saying that stemmed from speculators and not from any shortage of oil supplies.

"We speak to our customers all the time, and they have not expressed any shortage to us," he said, adding that the organization is closely monitoring market supply and demand.

As added assurance, he said, OPEC ministers will meet June 11 in Doha, Qatar, to reassess the situation. Meanwhile, he said, members would confer on a regular basis or could easily meet again before that date, if necessary.

"I think we are still efficient. It took just 3 days to convene our last extraordinary meeting in February," said Al Attiyah.

His upbeat attitude was in marked contrast to a statement issued before the meeting in which he said that OPEC was not in a position to control the world oil price. "The international political tensions have, without any doubt, reduced OPEC's influence on prices," Al Attiyah said. But he insisted, "We can still have an impact on the market."

He said member ministers would carefully review the market and would decide what measures to adopt "in the interests or order and stability." But he warned that the review would be "more complicated than usual because the near-term outlook is dominated by political factors over which OPEC has no control."

The average price for OPEC's basket of seven benchmark crudes lost 68¢ to $33.11/bbl Monday (OGJ Online, Mar. 11, 2003). However, that basket price has averaged $31.08/bbl so far this year and has remained above OPEC's targeted level of $22-28/bbl since late last year, despite the group's previous pledge to take action if market prices remained above or below the target level for extended periods.

Jefferies on Monday raised its 2003 price forecasts to an average $29/bbl for benchmark West Texas Intermediate crude and $5/MMbtu for natural gas at Henry Hub. That's up from its earlier projections of $25/bbl for oil and $4/MMbtu for gas.

"The keys to our higher forecast include bullish US and worldwide crude inventory levels, our belief that OPEC will remain a cohesive unit for the foreseeable future, and the difficulties non-OPEC producers are experiencing expanding production," Jefferies analysts reported.

"Although it is certainly a difficult time to pinpoint near-term oil price movements due to the Iraq situation and strike-induced fluctuations in Venezuela crude, the underlying principles that drive crude prices are solid, in our view," the analysts said.