OPEC loses control as oil supplies thin out

www.canada.com Chris Varcoe CanWest News Service; With files from The Associated Press and Bloomberg News Monday, March 10, 2003

VIENNA - As the world marches towards war in the Middle East and oil flirts with $38 US a barrel, all eyes are on OPEC to open its taps this week.

But as oil ministers descend on Vienna for a critical meeting on Tuesday, many feel the situation is beyond the cartel's reach.

Members of the Organization of Petroleum Exporting Countries are already pumping at or near their full production capacity, as worsening fears of a U.S.-led war on Iraq have pushed prices to 12-year highs.

A conflict would almost certainly cut off Iraq's crude exports, currently totalling about 2.3 million barrels a day, and could decrease Kuwait's output by as much as 400,000 barrels per day.

Meanwhile, cold winter weather in North America has shrunk inventories. With Venezuela's oil exports still recovering from a strike, OPEC would be hard-pressed to cover a shortfall.

"That's one of the reasons now why the market is so incredibly nervous," said Orrin Middleton, an energy analyst at Barclays Capital.

"The real problem is how much can OPEC really do?"

Oil for April delivery rose 78 cents to $37.78 US a barrel on the New York Mercantile Exchange last week.

Rising oil prices are pushing up gasoline and home heating bills across North America, sparking concerns that escalating energy costs will squeeze the global economy.

OPEC supplies about a third of the world's oil, but some analysts estimate it has only 1.4 million barrels a day in readily available spare capacity. The U.S. and other large importing countries are co-ordinating plans to tap their petroleum reserves as the ultimate cushion against a major supply disruption, should fighting erupt in Iraq.

OPEC can help by deciding Tuesday to suspend its production quotas and produce flat out. But analysts say international politics has robbed the cartel of much of its influence.

"For once OPEC is in the back seat, looking out the window. The U.S. is in the front seat, driving the war wagon," said Leo Drollas, chief economist at the London-based Centre for Global Energy Studies.

When OPEC oil ministers last met two months ago, they decided to increase the group's production target by 6.5 per cent to 24.5 million barrels a day, in the hope of keeping prices at or below $28 US a barrel. Prices have climbed steadily since then.

"The timing is rather difficult for them because they cannot pre-empt a decision that is not officially taken, which is a war," said Vera de Ladoucette of Cambridge

Energy Research Associates.

However, there may be some resistance to production increases. Algeria's oil minister said Sunday there will be enough oil in the marketplace, particularly during the April-to-June period when demand typically falls.

OPEC dreads a release of crude from importers' strategic reserves because such a step would reduce the cartel's control over supplies.

IEA countries have four billion barrels of strategic crude reserves. The United States has enough to cover 39 days of imports in case of a complete halt in foreign supplies.

Some analysts have urged importing countries to release oil from their reserves even before a war, to forestall a supply shortage or another spike in prices.

"In fact they should do it now," Drollas said, "before anything happens, because it takes time for the stuff to come through the system."