OPEC faces critical meeting

europe.cnn.com Friday, January 10, 2003 Posted: 1640 GMT

VIENNA, Austria -- When members of the Organization of Petroleum Exporting Countries meet on Sunday they will be faced with two crucial questions: How much new oil should flow to the West, and how will that decision affect Saudi Arabia, the world's biggest producer, and the United States, the No. 1 importer.

The meeting in Vienna was called by the 11-member cartel to deal with a shortage of crude caused by the six-week national strike in Venezuela.

The strike, led by opponents of President Hugo Chavez, has cut oil shipments from the fifth biggest exporter to just a tickle.

And that has squeezed supplies to the United States and other major industrialised countries and helped boost the price of oil to two-year highs. About 25 percent of that increase has come since the strike began on December 2.

Oil has been trading just below $30 a barrel on the International Petroleum Exchange in London and almost $33 on the New York Mercantile Exchange in New York. Both are well above OPEC's preferred range of $22-$28.

With the threat of war in Iraq, which could also curtail shipments from the oil-rich Gulf region, there are real concerns that higher oil prices could soon threaten the global economy.

The decisions made by OPEC will "make a little bit of virtue out of a necessity," Peter Gignoux, an oil analyst at Schroder Salomon Smith Barney, told CNN. "At the moment [pumping more oil]... is good for the consumer and OPEC can take credit for that."

For Saudi Arabia, the meeting on Sunday should also shed some light on how the OPEC kingpin sees itself in relation to cartel members and to the United States.

It wants to lift output by as much as 2 million barrels a day from the current level of 23 million barrels to cover for losses from the strike in Venezuela.

Saudi Arabia has a vested interest in moderating prices, just as the West does, because previous spikes -- like those in the 1970s and during the 1990-1991 Gulf War -- were followed by economic slumps, which in turn reduced demand and sent prices tumbling.

"It is clearly in Saudi Arabia's interest to mitigate high prices," Paul Stevens, professor of petroleum policy at Britain's Dundee University, told Reuters.

Other members of OPEC -- which provides about a third of the 75 millions barrels consumed globally each day -- are keen to expand their markets and not encourage customers to seek out other sources of fuel such as natural gas.

"From a purely commercial point of view, the last time prices went very high it didn't do OPEC any good," John Mitchell, associate fellow at the Royal Institute of International Affairs, told Reuters.

OPEC unlikely to support Saudi request

But Saudi Arabia may find its muscle is not as strong as it once was.

It is unlikely that other OPEC members will go along with Saudi Arabia's request, partly because they see a 2 million barrel increase as unrealistic, and party because they do not want to be seen as bowing to U.S. pressure for much higher output levels.

Instead, Saudi Arabia is expected to compromise and accept an increase of about a 1.5 million extra barrels a day, or 7 percent than what is now being pumped. Members are also expected to agree to leave the door open to more if war breaks out in Iraq.

Saudi Arabia is anxious to show the U.S. that it won't be pushed around by its former ally in the Gulf War. Their relationship has cooled since the September 11 attacks, perpetrated by mostly Saudi nationals. Still, their mutual interest in the oil sector remains strong.

"From a political point of view, I am sure they don't want to be seen to be just doing what the U.S. wants, but on the other hand nor do they want to create enemies,'' says Mitchell.

The U.S. has been quite vocal in urging OPEC and other oil producers -- like Russia, Central Asia and Africa -- to hike output to keep a lid on oil prices as its energy stockpiles decline due to the strike in Venezuela, which supplies the U.S. with 14 percent of its crude oil imports.

Guy Caruso, the head of the U.S. Energy Information Administration (EIA) said on Thursday that a decision by OPEC to increase oil output by up to 1.5 million barrels a day would only make a "dent'' in making up for crude exports lost as a result of the strike.

"Clearly we've lost roughly 2.5 million barrels a day to the world market from Venezuela, so any additional oil [from OPEC] would offset some of that,'' Caruso told Reuters. "Obviously, if they [OPEC members] want to make a big impact, [pump] more than that.''

Those comments has been dismissed a simply posturing by the U.S.

"The whole point of OPEC releasing more oil was to help cover Venezuela, so the statement from the EIA was a little surprising,'' one broker in New York told Reuters.

Stevens, of Dundee University, added: "The idea that the United States can bang the table and tell OPEC and Saudi Arabia what to do is divorced from reality."