OPEC's move a drop in bucket

money.cnn.com Oil prices, economists, analysts unimpressed with cartel's call for increased production. January 13, 2003: 4:26 PM EST

NEW YORK (CNN/Money) - Oil prices fell briefly Monday after OPEC's decision this weekend to boost production, but analysts doubted the cartel would do enough to make a significant change in prices or in the U.S. economy -- and news of a new supply disruption sent prices rising again.

The Organization of Petroleum Exporting Countries (OPEC), a group of 11 nations that supplies about 40 percent of the world's oil and sits on about 75 percent of all the world's known oil reserves, agreed Sunday to boost production by 6.5 percent, or 1.5 million barrels per day, to 24.5 million barrels per day.

But the increased output quota, which takes effect Feb. 1, does not even make up for the estimated 2 million barrels per day lost because of an oilworkers' strike in Venezuela, OPEC's third-largest oil producer.

The strike has pushed oil prices to more than $30 a barrel, well above OPEC's target price of $22-to-$28 a barrel. Higher prices could be bad news for OPEC if they keep a lid on oil demand.

Higher prices are certainly bad news for the U.S. economy, acting as a tax on anybody who needs to buy petroleum products on a regular basis -- in other words, pretty much everybody.

"Rising oil prices are quite unhelpful, and falling prices are quite helpful in terms of giving stimulus to the economy," said Rory Robertson, interest-rate strategist at Macquarie Equities (USA). "Lower prices feed through pretty well to everyone immediately."

But the initial drop in prices following OPEC's announcement was pretty puny, and it disappeared by the end of the day Monday, after news of the shutdown of two oil fields in the North Sea.

The price of a barrel of light crude oil for February delivery rose 58 cents to close at $32.26 in New York trade. In London, Brent crude jumped 67 cents to settle at $29.40.

"The fact that the North Sea output problem is supporting the market really shows how tight the physical crude supply is," GNI analyst Lawrence Eagles told Reuters.

Unfortunately, oil prices don't seem likely to go much lower at least until the Venezuelan strike ends, according to many oil analysts. Even then, lingering uncertainty about the potential for a U.S.-led war in Iraq -- OPEC's fourth-largest producer -- will keep prices high.

"We're not likely to see oil prices going lower until there's resolution on the Iraqi front," said Fadel Gheit, oil analyst at Fahnestock & Co.

Gheit and other analysts also pointed out that OPEC's production target is probably not even realistic. For example, OPEC's plan calls for Venezuela to boost its production to about 2.6 million barrels per day. That's going to be tough to do when oil workers aren't working; Venezuela's exports have been cut to about 500,000 barrels per day and aren't likely to increase until its strike is over.

Aside from Saudi Arabia, other OPEC nations have little spare production capacity, and OPEC is probably reluctant to boost production too much, anyway, considering the possibility that several factors might come together to drive oil prices much lower in coming months.

By March, Iraq and Venezuela could be sorted out, world oil consumption will be falling, and a brutal winter in Russia, the world's second-biggest oil producer, will be ending. This combination could lead to oil prices plunging $10 a barrel, Gheit said.