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Oil Cartel Agrees to Reduction in Pumping

Energy: OPEC's decision could further exacerbate downward movement of the global economy, industry analysts say.

March 17, 2001|WILLIAM DROZDIAK | WASHINGTON POST

VIENNA — The Organization of Petroleum Exporting Countries agreed Friday to slash crude oil production by about 1 million barrels a day, hoping to shore up sagging prices at a time when the deteriorating outlook for the global economy is depressing growth in energy demand.

The cartel's action comes as a blow to consumer countries, such as the United States, Japan, Europe and many energy-starved developing nations, which are likely to find their fuel bills rising again and causing a substantial transfer of net wealth to the 10 OPEC nations that pump about 40% of the world's oil supplies.

After raising production on four successive occasions last year after prices soared to $35 a barrel, OPEC oil ministers have reversed course since January. They now have embarked on a strategy of curtailing production to keep prices above the target of $25 a barrel, just as demand is weakening as winter comes to an end in the Northern Hemisphere and the American economic slowdown spreads to Europe and Asia.

OPEC's latest production cutback, following a decision two months ago to remove 1.5 million barrels a day from the market, was greeted with dismay by consumer countries that fear it will drive up gasoline prices. With U.S. oil stocks at their lowest level in three decades, analysts said a sustained squeeze on oil supplies would almost certainly provoke dramatic spikes in the price of gasoline gas by the summer.

The European Union called the decision ill-timed and unjustified given the state of the world economy. The United States also deplored the OPEC action, as President Bush said he would have preferred the cartel's members to maintain, if not increase, production levels.

Chakib Khelil, Algeria's oil minister who also serves as OPEC's president, said the partition of the new oil quotas among the cartel's members would be announced today. He said it was vital to confer with such key non-OPEC oil producers as Mexico, Norway, Angola and Oman to ensure that they would cooperate with the strategy.

OPEC officials said they hope to secure commitments from non-OPEC producers that they would curtail production by an additional 500,000 barrels a day. But Norway has declared that it will not lower production, claiming that to do so would be harmful to the global economy. Mexico also has not clarified its intentions, and U.S. officials said Bush hoped to persuade Mexican President Vicente Fox to realize that lower oil prices would serve the economic interests of the two neighbors.

Bush met Thursday with Saudi Arabia Ambassador Prince Bandar bin Sultan, but U.S. officials declined to say whether they discussed oil production. As the world's largest oil exporter, Saudi Arabia wields enormous influence over the cartel's strategy.

"We needed to make what we feel is a reasonable cut to stabilize the market," said Qatari Oil Minister Abdullah bin Hamad Attiyah. "We understand the concerns of consumer countries, but we think we are making the right decision to keep supply and demand in the proper balance."

But some analysts contend that OPEC may be hurting itself in the long run by trying to keep oil prices artificially high at a time when the global economy is clearly running into trouble.

By forcing consumer countries to pay larger fuel bills and possibly tipping their economies into recession, OPEC could find that future oil demand will shrink much faster--even while the incentive grows to discover new oil supplies that could eventually cause the very glut that OPEC wants to avoid.

"They are pushing things to the extreme by cutting a million barrels a day at such a fragile time for the global economy," said Roger Diwan, an analyst at Petroleum Finance Corp. in Washington. "By this summer, OPEC may have to start pumping much more oil to avoid losing control of the market and seeing prices go out of control."

Khelil said OPEC is trying to manage a global energy market that is very difficult to read. He also rejected arguments that OPEC was not showing sensitivity to the plight of Asian developing countries, which represent the biggest market for crude supplies from the Persian Gulf and are struggling to cope with the pain of high energy prices.

"We want to meet the demand for all countries who are in big economic troubles, and we don't want to create any more pain for these countries by releasing less than is needed," Khelil said.

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