OPEC faces struggle to replace Iraq output

www.theage.com.au March 4 2003 By Alex Lawler London

OPEC, supplier of a third of the world's oil, may struggle to replace output from Iraq should the nation's exports be halted through war because most members are already pumping near their limit, analysts said.

Oil prices have surged 63 per cent in the past year and last week approached $US40, the highest price since the Gulf War, after US inventories fell to some of the lowest levels 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. "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. The group raised quotas twice this year to fill a shortage caused by a strike in Venezuela.

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 was similar, analysts said.

The US and other industrialised countries hold inventories to alleviate supply shortages, to avert a repeat of the shortages during the 1973 Arab oil embargo. US Energy Secretary Spencer Abraham has said the nation may use its 600-million-barrel reserve to offset any "severe" disruption in supply.

A recovery in OPEC's oil capacity depends in part on Venezuela. Production there has risen to 2 million barrels a day, the Government said, but that is still only two-thirds of output in November.

OPEC has no consensus 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.

OPEC secretary-general Alvaro Silva said supply was equal to demand, while oil officials from Kuwait and Qatar said last week the group might raise output. Other officials have said output quotas will be lifted should Iraq's exports be cut off.

JP Morgan estimates OPEC could muster another 2 million barrels a day, 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 might already be pumping 9 million barrels a day, analysts said. The kingdom, which doesn't disclose its production, says it can raise output to 10.5 million barrels a day within 90 days.

The International Energy Agency was likely to tap inventories in the event of a war on Iraq, the group's executive director said last week. The IEA co-ordinates the use of government oil reserves in the US and 25 industrialised nations.

A stockpile release was "likely but not certain" should Iraq be attacked, the agency's executive director, Claude Mandil, said in London.

-Bloomberg