OPEC faces supply struggle if war starts
www.smh.com.au March 4 2003
OPEC, supplier of a third of the world's oil, may struggle to replace output from Iraq should that nation's exports be halted by a war because most members are pumping near their limit, analysts said.
Oil prices have surged 63 per cent in the past year and last week approached $US40, the highest since the 1990-91 Gulf War, after US inventories fell to among the lowest level in three decades. Should an attack disrupt Iraqi supply, oil importers will have to tap emergency reserves to prevent soaring prices, analysts said.
"The problem is OPEC is getting close to the limit of what it can do," said Julian Lee, a senior analyst at the Centre for Global Energy Studies in London, a think tank founded by former Saudi oil minister Sheikh Zaki Yamani. "Prices aren't going to come down much until US inventories start to rise."
Analysts put OPEC's spare capacity at about 2 million barrels a day, equal to 2.6 per cent of world output and less than Iraq's daily output of 2.5 million barrels. Two million barrels is enough to meet daily demand in France, the world's fifth-largest economy.
OPEC members, except Iraq, agree to restrain oil supply to boost prices. They increased quotas twice this year to fill a shortage caused by a strike in Venezuela and after a colder-than-normal winter boosted demand for heating fuel.
In 2000 OPEC neared the limits of its spare capacity after the group raised production quotas and US prices surged to more than $US37 in September of that year. The present situation is similar, analysts said.
"If war starts with Iraq, there will have to be a significant release from the strategic reserves in the US to avoid an economic catastrophe," said Adam Sieminski, an oil strategist at Deutsche Bank.
The US and other industrialised countries hold inventories to alleviate supply shortages, reserves built to avert a repeat of the shortages seen during the 1973 Arab oil embargo. US Energy Secretary Spencer Abraham has said the nation may use its 600 million-barrel strategic reserve to offset any "severe" disruption in supply.
A recovery in OPEC's oil capacity depends in part on Venezuela. Production in the South American country has risen to 2 million barrels a day, the Government said. That is still two-thirds of output levels last November.
No consensus has emerged from OPEC on what steps to take on March 11, when oil ministers meet in Vienna to set policy for the second quarter. At that time, oil demand normally slows because of the northern hemisphere spring.
"We acknowledge that there's a shortage in the US," said OPEC President Abdullah bin Hamad al-Attiyah, who is also the oil minister for Qatar. "There's a lot of oil in the middle of the sea heading to the Gulf coast and we are still not sure yet whether that will be sufficient."
OPEC Secretary-General Alvaro Silva said current supply was equal to demand, while oil officials from Kuwait and Qatar said last week the group may raise output. Other officials have said output quotas will be lifted entirely should Iraq's exports be cut off.
JP Morgan Chase estimates OPEC could muster another 2 million barrels a day, largely from Saudi Arabia and the United Arab Emirates.
"OPEC is irrelevant at the moment," said Lawrence Eagles, an analyst at GNI-Man Financial in Belfast, Northern Ireland. "Now, there's only one country that counts, Saudi Arabia."
Saudi Arabia may already be pumping 9 million barrels a day, Mr Eagles and other analysts said. The kingdom says it can raise output to 10.5 million barrels a day within 90 days.
The International Energy Agency is likely to tap inventories in the event of a war on Iraq, the group's executive director said. The IEA coordinates the use of government oil reserves in the US and 25 industrialised nations.
A stockpile release is "likely but not certain" should Iraq be attacked, the agency's executive director, Claude Mandil, said. He was "confident" OPEC would be first to take steps by raising output.
Bloomberg