OPEC may seek to lower prices
OPEC, which pumps a third of the world's oil, may struggle to lower prices from among the highest levels in 12 years as the threat of war with Iraq builds and members near their limit for output.
Ministers at a meeting on Tuesday in Vienna will probably approve a plan backed by Saudi Arabia to pump as much oil as possible should a war disrupt supply from Iraq, the third-largest Middle East producer, officials and analysts said.
Yesterday, Iraq's deputy oil secretary warned that Iraq would take up arms to protect its oil wealth, and predicted that if a U.S.-led invasion begins, the price of oil could reach US$70 a barrel.
Oil prices last week reached the highest since Iraq invaded Kuwait in 1990 and touched US$39.99 a barrel in New York, raising fuel costs and threatening to stunt economic growth. Only Saudi Arabia and the United Arab Emirates have the capacity to refill U.S. inventories, which set a 28-year low last month.
"There isn't enough OPEC capacity to cover the loss of Iraq," said Leo Drollas, deputy executive director of the Center for Global Energy Studies in London, a consulting company founded by former Saudi Oil Minister Sheikh Zaki Yamani. "We're entering a probable war with low inventory cover. Prices could go higher still as the war drums beat louder."
Ten OPEC countries set oil-output quotas as a way to control oil prices and supply, and member Iraq has no quota because its sales are under United Nations oversight. The group raised quotas in January and February after exports from Venezuela were crimped by a strike and a colder-than-normal winter raised demand.
Oil ministers will set policy for the second quarter as analysts expect any U.S.-led attack on Iraq, source of 2.5 million barrels a day or 3 percent of the world's oil, to take place within weeks. Oil demand normally declines after the first quarter because of the Northern Hemisphere spring.
Indonesia's Oil Minister, Purnomo Yusgiantoro, said OPEC should keep quotas unchanged until the group knows the result of the standoff between the U.S. and Iraq. Saudi Arabia, the United Arab Emirates and Kuwait want to raise quotas, he said.
Whether OPEC suspends restraints or not, members are ignoring them. In February, all nations exceeded their output quota except Indonesia and Venezuela, members unable to pump more.
"They already have an informal understanding that everybody should produce as much as they can," said Adam Sieminski from Deustche Bank AG. "Probably the best decision that OPEC could make is steady as she goes."
OPEC's oil production rose 6.3 percent in February, the biggest monthly increase in four years, as output in Venezuela rebounded after the two-month strike and other nations pumped more, a Bloomberg News survey this week showed.
Analysts put OPEC's spare capacity at about 2 million barrels a day, less than Iraq's daily output. Two million barrels is enough to meet daily demand in France, the world's fifth-largest economy.
The situation would worsen should Kuwait close oil fields in the event of war. Kuwait, OPEC's sixth-largest producer in February, said this week it will close all northern oil fields if the U.S. attacks neighboring Iraq to avert damage. The fields produce about 500,000 barrels a day.
(Bloomberg News)