World: OPEC Expected To Maintain Quotas, But Reassures Markets On Supplies

www.rferl.org By Mark Baker

OPEC oil ministers, meeting yesterday in Vienna, decided for the time being not to increase output quotas -- even as prices have risen to their highest levels since the 1991 Gulf War amid concern over another war in Iraq. But the cartel signaled it would step up output in the event of a crisis to prevent an oil shortage. The question remains, however: With many OPEC members already producing at capacity, how much can the cartel do? RFE/RL correspondent Mark Baker has the story.

Prague, 12 March 2003 (RFE/RL) -- OPEC oil ministers have decided to maintain current oil output quotas -- even as the threat of war in Iraq has pushed oil prices to 12-year highs.

The cartel, which met yesterday in Vienna, announced it will hold output steady at the current 24.5 million barrels a day. OPEC's 11 members account for around one-third of world oil production.

However, in a bid to ease concern over the higher prices, Saudi Oil Minister Ali al-Naimi said his country -- OPEC's largest producer -- is prepared to increase supplies should war come, saying, "There will be no shortage of oil."

He told reporters yesterday in Vienna, "The objectives of the organization (OPEC) are to have a stable market, a fair price and a fair return on investment."

Al-Naimi's words were reinforced by Qatar's oil minister, Abdullah al-Attiyah, the current OPEC president.

"We are always, OPEC is always trying to stabilize the market, sending a strong message to our consumers," he said. "We are working very closely to the market and if there is any shortage in the market, we will interfere at the right time to balance the demand and the supply."

OPEC has come under increasing pressure to suspend its output quotas as oil prices have risen in recent days to nearly $40 a barrel. This compares to $25 a barrel one year ago.

The price rise reflects concern that a war in Iraq would badly disrupt oil supplies. Iraq's own output of around 2 million barrels a day would be expected to stop once war starts. The effect of that shortfall would be worsened if oil fields in neighboring Kuwait or other Gulf states were damaged.

One worst-case war scenario, published earlier this year by a British businessmen's group, sees oil rising to $80 a barrel.

The threat of war is not the only factor pushing prices higher. Strikes this year in Venezuela -- a major OPEC producer -- halted oil output there. The country has since renewed oil exports but at levels below its OPEC quota of 2.5 million barrels a day.

Analysts say OPEC's decision not to suspend quotas reflects deep differences among cartel members over a possible war in Iraq. Iran, for one, is opposed to any measure -- such as lowering prices -- that would lessen the economic impact of any U.S.-led attack.

Iranian Oil Minister Bijan Namdar Zanganeh said yesterday that "Iran will not back politically motivated decisions."

Analysts say leaving production quotas in place may also make sense economically. OPEC is obviously betting that any war in Iraq will be short and successful. Analysts say an OPEC decision now to increase oil production would risk seeing prices plummet after hostilities are over and war fears ease.

Demand traditionally slackens in the spring as temperatures in the Northern Hemisphere rise and the need for heating oil in Europe and North America falls. Some analysts say prices could soon drop below OPEC's informal target of between $22 and $28 a barrel.

Bill Farren-Price, the Mediterranean editor of the Cyprus-based "Middle East Economic Survey," says there's sufficient supply in the market right now.

"There's plenty of oil in the market at the moment. The oil prices are, some of the oil prices are a result of what people are calling a 'war premium' -- an expectation of shortages."

But analysts say the strategy holds risks, as well. Many OPEC members -- aside from Saudi Arabia -- are already producing at maximum capacity and do not have the ability to expand oil output if it becomes necessary.

Any significant price rise could damage fledgling economic recoveries in the United States and Europe, and in turn lessen demand for oil. Economists say even the most recent rise in the past few months has hurt energy-dependent businesses, such as airlines.

Prolonged high oil prices would also spur conservation measures in the West and catalyze development of non-oil energy sources, much as they did in the 1980s following the OPEC price hikes of the 1970s and early '80s. This is an outcome OPEC hopes to avoid.

Farren-Price says if an Iraq war carries on longer and causes more damage than expected, the International Energy Agency (IEA) could step in to authorize members to release national oil stocks. The agency did this in the first Gulf war in 1991, as price rose to more than $40 a barrel. IEA member governments are committed to taking joint measures to meet oil supply emergencies.

Farren-Price says, "If there is a conflict, and it shuts down a lot of production that OPEC is not able to deal with, then we will probably see the IEA -- the International Energy Agency -- swing into action, as they did in the first Gulf war in 1991, to authorize a release of members' stock to cope with the shortfall."

U.S. Energy Secretary Spencer Abrahams was also in Vienna to meet with some OPEC ministers. He was expected to lobby quietly for output hikes to ease price pressure.

The U.S. has said it could release some of its 600-million-barrel emergency oil reserve to dampen prices. But observers say this would only be a last resort measure, that the administration of U.S. President George W. Bush would rather any shortfall be made up by oil suppliers.