BIRD ON OPEC: Ignoring The Elephant In Combat Boots
sg.biz.yahoo.com Wednesday March 12, 8:33 PM (This article was published earlier Wednesday.) By David Bird Of DOW JONES NEWSWIRES
VIENNA (Dow Jones)--"Iraq" and "war" are the words on everyone's lips at the OPEC meeting here, but they aren't found in the group's official communique.
Dancing around the elephant in combat boots in the middle of the room, ministers instead referred to "prevailing geopolitical tensions" in their deal to keep current production policy in place as war approaches.
As with the flowery language employed by the Organization of Petroleum Exporting Countries in its press statement, the group's action itself masks an extremely difficult time for producers, who admit they're powerless to exert much influence over fear-fueled oil prices.
OPEC took the only decision politically acceptable to all its members, officially keeping its 24.5 million b/d output ceiling in place, while pumping as much as they dare amid the current turbulence.
OPEC's President Abdullah bin Hamad al-Attiyah recently acknowledged in his own unique way that ministers don't turn a blind eye to quota violations, but instead watch members' output levels with "one eye open and one eye closed."
In reality, minister have one eye on the rancorous debate at the United Nations Security Council and the other on the massive military buildup in the world's biggest oil patch.
Too Much Or Too Little?
As a quarter-million U.S. troops aim their gun barrels at Iraqi President Saddam Hussein, OPEC can find itself in the blink of an eye supplying far too few or far too many oil barrels to the market.
Ministers shot down a proposal from Saudi Arabia, the only producer with significant spare production capacity, to essentially abandon output restraints amid the war fervor.
Iran led the opposition, on public concerns that OPEC could be seen as giving the green light for a U.S.-led attack on Iraq, by acting in advance to cover exports that could be lost in a war.
But the position of Iran and its allies spoke as much about bad memories of painful efforts to cap runaway production in the past.
"We don't want a one-way ticket to Jakarta," a senior delegate said, referring to the price crash sparked in the Indonesian capital in late 1997 when OPEC misread the market and caused a glut.
OPEC is adding to market anxiety by keeping its capacity figures private, estimating them at a total of 2 million to 4 million b/d. But some independent assessments put them at just 1.5 million b/d, excluding Iraq.
Despite stunted output from Venezuela, still recovering from an oil-workers' strike, OPEC estimates first-quarter output will average 26.4 million b/d, or 1 million b/d over expected demand.
March output - including Iraq - looks to be close to 28 million b/d, compared with demand of less than 23 million b/d. Even if Iraq's 2.4 million b/d is lost and some 700,000 b/d of Kuwaiti supplies are temporarily cut, the flow could be about 2 million b/d over demand.
No Additional Oil From The Saudis?
That's a key reason why Saudi Arabia, while claiming production capacity of 10.5 million b/d, isn't expected to pump beyond current levels of 9.2 million to 9.5 million b/d, even if the war occurs.
Many in OPEC believe that Iraq's oil flows could be interrupted for as little as two weeks in a war, with the U.S. avoiding damage to facilities and the current U.N. oil-for-food plan providing the administrative structure for continued oil sales.
The Saudis won't divulge their production plans, but Saudi officials have told Western officials they don't want to push output to the long-term capacity peak because they don't believe there will be the need to do so, and because a short-term surge followed by shutting-in of wells could lead to future problems.
OPEC delegates say technical experts believe that such action could damage Saudi reservoirs, by causing pressure losses, resulting in lost production capability of two barrels of crude for every barrel produced.
Still, current high OPEC output may be needed to refill global oil stocks, with commercial crude inventories in the U.S. - the world's largest oil market - at their lowest level in a generation.
But many OPEC delegates believe that only a move by consumer countries in the International Energy Agency to open their emergency stockpiles will cool off prices soon.
In what was billed as a coincidental overlap of business meetings, U.S. Energy Secretary Spencer Abraham was in Vienna Tuesday, where he met Saudi Oil Minister Ali Naimi.
Unprecedented Producer-Consumer Talks
Following that meeting, Abraham praised OPEC for covering supply shortages so far by raising output and was thankful for assurances that the Saudis would do more, if needed.
Abraham said the U.S. won't use its 600-million-barrel Strategic Petroleum Reserve to bring down prices, but wouldn't hesitate to use it quickly as a last resort to avoid a shortage.
The unprecedented high-profile talk of top oil representatives from the world's biggest producer and the world's biggest consumer, on the sidelines of an OPEC policy meeting, speaks volumes about the shared concerns over the precarious market situation.
Both Naimi and Abraham believe a sharp drop in oil prices is in both their countries' best interests.
"High prices definitely have a negative impact on demand," Naimi said, while in the U.S. retail gasoline prices are just pennies from a record high and diesel fuel at the pumps have set consecutive all-time high prices in the last several weeks.
OPEC set its next meeting for June 11 in Doha, Qatar