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OPEC Says It Will Cut 1.2 Million Barrels a Day
Move Follows Emergency Meeting

By Steven Mufson
Washington Post Staff Writer
Friday, October 20, 2006

The Organization of the Petroleum Exporting Countries early today announced plans to cut oil production by 1.2 million barrels a day, equal to 4.3 percent of the group's total, in an effort to stop the slide in oil prices over the past three months.

The unexpectedly large size of the cut, the cartel's first since December 2004, was aimed at the many oil traders and analysts who still take a skeptical view of OPEC's will to follow through and carry out meaningful output reductions.

In contrast to the jawboning about production cuts that has been going on for the past three weeks, this plan emerged from an emergency meeting in the Qatari capital of Doha and had the crucial support of Saudi Arabia, the biggest producer in the group.

Qatar's energy minister, Abdullah bin Hamad al-Attiyah, announced the decision after a late-night session and said that the production cuts would take effect Nov. 1 and be shared by all OPEC members except Iraq, but he did not say how the cuts would be allocated among the members, a key issue.

Earlier as he arrived for the meeting, Saudi Arabia's Oil Minister Ali al-Naimi threw his support behind a 1 million-barrel-a-day cut in production. "We're trying to get the market back to its normal equilibrium and the price will take care of itself," he told reporters in the Qatari capital. Prices have fallen from a peak of $78.40 a barrel in July to just under $60 a barrel recently.

Many analysts remained doubtful that the 11-member group could agree on how to divvy up the production cuts or that it could avoid cheating by members even if they did reach an agreement. With prices high, the incentive for members to cheat is also high.

"Talk is cheap, oil isn't," said Fadel Gheit, oil analyst with Oppenheimer & Co. He said that OPEC members "never thought in their most optimistic forecasts that oil prices would be as high for as long as they have been. For them to have a knee-jerk reaction to $60 oil doesn't make sense."

Before the final agreement was announced, crude oil prices on the New York Mercantile Exchange closed at $58.50 a barrel, up 85 cents, for November delivery.

But other analysts said that OPEC's move would have an impact. Even if the cuts fall short of the stated target, "clearly cuts are on the way, and just at the moment when demand for crude oil is about to skyrocket" because of the start of the winter heating season, said Edward Morse, chief energy economist at Lehman Brothers. Morse said he was surprised that Saudi Arabia agreed to publicly cut production just before the U.S. elections. "OPEC doesn't like to see the market betting against it and clearly felt the need to act to change the psychology of the marketplace," he said.

It remained unclear what price level OPEC is trying to support. As prices have risen, so too have the cartel members' expectations. Though down about 25 percent from its July peak, the price of crude oil is still high by historical standards. Just four years ago, OPEC had a target range of $22 to $28 a barrel. Now many members talk about supporting a price of $55 a barrel. (OPEC's oil basket usually carries a slightly lower value than the higher quality oil used as a benchmark on spot markets.)

Higher oil revenues have political as well as economic implications. Oil dollars have helped bankroll Venezuela's efforts to spread its influence in South America, Iran's assistance to Hezbollah and the United Arab Emirates' glittering new buildings. Virtually all OPEC members have boosted spending to contain domestic social pressures.

In Saudi Arabia, where there is a rapidly growing underemployed labor force, high petroleum prices in 2005 helped double the central banks' foreign asset holdings; they also fueled 6.6 percent growth and a budget surplus equal to 18.4 percent of gross domestic product despite a sharp increase in government spending, according to an International Monetary Fund report in August. This year, average oil prices have been higher.

Saudi support is crucial for any effective OPEC cut. The kingdom accounts for nearly 30 percent of OPEC output and it is the group's swing producer. But within OPEC, it is also considered a moderate on pricing, preferring a stable price to a volatile one that might encourage too many alternative energy projects. Most traders believe that Saudi Arabia will shoulder about half the burden of OPEC's actual cuts. Bloomberg News reported that before the meeting, Naimi said: "What is 33 percent of 1 million -- that is an excellent number."

One issue the group has faced as it has negotiated over how to implement the 1.2 million-barrel-a-day cut is whether to calculate the cut from members' actual production or from their quotas, the production ceilings that were established by mutual agreement years ago and have been suspended. Kuwait, Algeria and Libya have expanded production beyond their old quotas. Venezuela, Iran and Indonesia are already producing far less than their quotas. Naimi said as he arrived for the meeting that cuts should come out of current production; Iran's oil minister, Kazem Vaziri Hamaneh, said in a statement on the ministry's Web site that cuts should be calculated from quotas, Bloomberg News reported. Last night, the Qatari minister, Attiyah, said the cuts would be from current production.

A senior European oil trader and consultant said yesterday that he doubted that OPEC could implement more than half a million barrels a day of output cuts, though he said even that might be enough to stabilize oil prices.

Without ceremony, Saudi Arabia has already trimmed its production in recent months. Its output has been reduced from 9.5 million barrels a day in the spring to 9.1 million barrels a day currently. Most of the reduction has been in low-quality crude oil that is difficult to refine and less sought after. Further reductions would probably be in this area, oil traders said.

OPEC has a regularly scheduled meeting in the Nigerian capital, Abuja, on Dec. 14. Ministers said they would review market conditions then, and cut further if necessary to prop up prices.

For the Bush administration, OPEC's accord was a disappointment. "We continue to believe that it is best for oil producers and consumers alike to allow free markets to determine issues of supply, demand and price," Energy Secretary Samuel W. Bodman said in a statement last night. "As past experience has shown, market intervention is not beneficial for producing or consuming nations."

For the big oil producing companies, high prices remain welcome news. Doug Leggate, oil analyst at Citigroup Inc., said, "For the [producing] companies in this sector, the Exxon Mobils, they are printing money at these prices."

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