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OPEC Pressures Non-Member Nations to Reduce Oil Production

Energy: Skepticism that non-cartel producers will cut output sends crude futures down 9%.


OPEC raised the prospect of an all-out oil price war Wednesday, demanding that major producers Russia, Norway and Mexico join the cartel in cutting production or risk the consequences of a worldwide collapse of prices.

The Organization of Petroleum Exporting Countries threw down the gauntlet at its meeting in Vienna, saying it would cut production by as much as 1.5 million barrels a day--but only if the non-cartel producers go along with cuts of their own.

OPEC's demand that the other producers shave 500,000 barrels of daily output was widely interpreted as a sign of the cartel's exasperation that its cuts in recent months have only allowed marauding non-cartel producers to grab market share.

"The organization has been shouldering the full burden of maintaining oil market stability," OPEC said in a statement. "The current global economic slowdown on the oil market requires firm and concrete cooperation between OPEC and non-OPEC oil-producing countries in the form of equitable sharing of further reductions."

Late Wednesday, OPEC got a positive response from Mexico, the world's 10th-largest oil producer, which announced it would cut exports by 100,000 barrels a day, a sizable 6% reduction. Russia was reported to be reconsidering its earlier decision to reduce daily output by an insubstantial 30,000 barrels.

Skepticism that non-cartel producers would go along with the OPEC demand sent prices to their lowest level since July 1999. Near-month crude futures fell nearly 9%, to $19.74 a barrel, on the New York Mercantile Exchange; prices are off 26% this year, mostly because of falling demand.

The effort by the 11-nation OPEC to impose production discipline comes amid softening global demand--especially in the aftermath of the Sept. 11 terrorist attacks--and cutthroat competition among producers to maintain market share.

Global oil demand fell by about 1.2 million barrels a day, or about 1.6%, to 75.7 million in the six months ended Sept. 30, according to the Paris-based International Energy Agency.

OPEC members have agreed to current daily production quotas totaling 23.2 million barrels, a cut of 3.5 million barrels since the start of the year. But cartel members have been exceeding production ceilings by about half a million barrels a day, analysts said.

The cartel's efforts are complicated by significant new supplies coming to market from non-OPEC countries such as Russia, Angola, Oman, Colombia and most notably Kazakhstan, where a newly completed pipeline connecting its Tengiz oil field to the Black Sea will be adding 1% to global supplies during the next year.

The main culprit in OPEC's eyes is Russia, said John Kingston, global oil economist at Platts, a division of McGraw-Hill. Already the world's second-largest oil exporter and rapidly gaining strength on the world scene, Russia has boosted production by nearly 600,000 barrels a day, to 8.5 million barrels.

Analysts noted that the Russian government cannot unilaterally impose production cuts on its major oil producers, which for the most part have been privatized.

But OPEC's move signals that the cartel is ready to continue pumping at current levels to maintain its share of global oil markets, even if it sends prices plummeting--an implied threat that the cartel could launch a crude oil price war as was last seen in 1998.

"'If they don't like $20-a-barrel oil, let's see how they like $10-a-barrel oil' is what the Saudis are saying here," Kingston said.

A price war is still a long shot, said economist Michael Lynch of DRI-Wefa of Lexington, Mass., partly because a free fall in crude prices could cause severe economic harm to producing countries badly in need of oil revenue, including Mexico, Saudi Arabia and Russia.

"It's a very blatant threat by OPEC, calling the non-cartel members' bluff," Lynch said. "Unless non-OPEC countries answer, and fairly quickly, with some reasonably positive response, you could see a price war."

Still, as of late Wednesday, neither Russia nor Mexico, the world's second-and 10th-largest oil producers, respectively, had officially responded to OPEC's call for cuts.

OPEC's attempts at such consensus fell flat this week. Norway declined to trim production at all, and Russian oil companies agreed to a cut amounting to less than one half of one percent of its output.

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