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Output of Crude Oil Gushes

A step-up in production by OPEC could reduce the economic shock of a military strike on Iraq.

November 14, 2002|Warren Vieth | Times Staff Writer

WASHINGTON — Saudi Arabia and other OPEC oil producers are flooding world markets with crude oil, a shift that experts say should help offset any economic dislocation from a military strike against Iraq.

The surge of production has helped wash away a $5-a-barrel "war premium" that pushed the price of crude above $30 in early October, industry experts say, and may have reduced the risk of spot shortages during the initial stages of a U.S.-led military offensive. If sustained, it also could boost the economies of the United States and other consuming countries.

"OPEC has increased production dramatically in the last 30 to 45 days, which is why we're seeing the price fall," said Larry Goldstein, president of the Petroleum Industry Research Foundation in New York.

The 11 members of the Organization of the Petroleum Exporting Countries have had little to say on the production boom. But some experts believe it reflects a deliberate strategy by key OPEC producers to stockpile crude closer to end markets in the United States, Europe and Asia, where it would be less vulnerable if war breaks out, and to prevent prices from rising to dangerously high levels.

"You have the potential for Iraq being taken offline very quickly, you have the potential for the winter being severe, and you have the question of whether we're coming out of a worldwide recession or sinking into one," said Ed Porter, research manager at the American Petroleum Institute, an industry trade group. "OPEC doesn't want to trigger something it didn't intend."

Some oil analysts see less charitable motives at work. They cite evidence of an escalating battle for market share between the Saudis and other OPEC members, who are exceeding their official production quotas as never before. The competition has been exacerbated by Iraqi production hikes linked to President Saddam Hussein's efforts to placate his critics and preserve his regime.

"The Saudis are focused on the long-term market for their oil," said Newport Beach energy economist Philip K. Verleger. "They don't want to let anybody else capture it. If other countries increase and cheat, they'll increase and cheat. They're not philanthropic."

But whatever the motive, the effect of sharply higher oil production is to ease a major economic concern: that war in the Middle East would spark fears of shortages, driving crude prices sharply higher and damaging already shaky industrial economies.

The benchmark price of U.S. light sweet crude, responding to Iraq's promise of cooperation with U.N. weapons inspectors, fell 71 cents further Wednesday to $25.19 for a 42-gallon barrel, well below its October high of $30.83.

Analysts say a sustained $5-a-barrel decline in oil prices could boost U.S. economic growth by 0.2%.

So far, the drop in crude prices has not shown up at the gasoline pump. The prices of refined products respond to their own market dynamics, and rising demand, low gasoline inventories and reduced refinery output have combined to boost gasoline prices even as prices for crude have declined.

OPEC's rising output has improved the fortunes of oil transport companies. Tanker operators say increased demand for their services has allowed them to double the rates they charge for moving crude from terminals in the Middle East to deepwater ports in the Gulf of Mexico and other destinations.

In September, all OPEC members except Iraq agreed to individual quotas that would limit their combined production to 21.7 million barrels a day.

But the International Energy Agency in Paris reported Tuesday that actual "OPEC 10" output rose to 24.2 million barrels a day in October, setting a record for overproduction. The biggest quota buster was Saudi Arabia, which traditionally has exercised more restraint than other OPEC members.

The agency calculated daily world production of oil in October at 78.3 million barrels.

Goldstein of the Petroleum Industry Research Foundation said industry sources have told him that OPEC 10 production has continued its rapid rise this month and may be running as much as 3.5 million barrels a day above the official limit.

The extra oil has not yet made its way into refinery tanks in the U.S. and other consuming countries. Analysts say much of it remains in OPEC storage facilities or aboard giant tankers that take more than a month to cross the Atlantic. In addition, refiners may be drawing down their stocks and delaying purchases because they believe prices will continue to drop.

"The indicators suggest there's a tremendous amount of oil on the water looking for a home," Goldstein said.

Iraq's oil industry has been subject to U.N. restrictions since the end of the Gulf War in 1991, so it has been exempt from the OPEC quota-setting process.

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