OPEC to Consider Another Production-Quota Cut to Keep Prices Up

The crude oil tanker Seatrout is anchored near the Verrazano-Narrows Bridge in New York Harbor Monday, Dec. 11, 2006. America's trade deficit posted a dramatic decline in October, falling to the lowest level in 14 months as the price of crude oil plunged by a record amount. (AP Photo/Mark Lennihan) (Mark Lennihan - AP)

Oil prices are steady at more than $60 a barrel, the U.S. gasoline inventory is at the low end of the five-year average, and new Commerce Department figures show that oil imports in October siphoned $18.8 billion out of the U.S. economy, accounting for 29 percent of the country's trade deficit.

If that weren't bad enough for American consumers, the Organization of the Petroleum Exporting Countries is talking about cutting production further when it meets in the Nigerian capital Abuja tomorrow in an effort to make $60 the new price floor.

"It looks like they're either going to cut or have a cut in their hip pocket for February without a meeting," said Edward Morse, chief energy economist at Lehman Brothers.

Roger Diwan, an OPEC expert at the consulting firm PFC Energy, said that "between now and March, they're going to do another cut for sure." He added, "The only question is do they bite the bullet now or will they have another meeting in January in Vienna."

Calls for a new round of production cuts have come from traditional OPEC pricing hawks such as Iran. "Considering the considerable supply surplus over demand, we are trying to cut production," Iranian oil minister Kazem Vaziri Hamaneh told his ministry's press agency. "Iran, like most OPEC members, does not consider an oil price of less than $60 a barrel as appropriate."

Even more moderate OPEC members, such as the cartel's swing producer Saudi Arabia, have hinted at output cuts. Saudi oil minister Ali Naimi said recently that world inventories are 100 million barrels too high.

At the OPEC meeting in October, members agreed to cut production by 1.2 million barrels a day from an estimated 29.7 million barrels a day. The 11-member group has not met that goal, but it has cut more than half a million barrels a day. Prices, which had fallen to about $55 a barrel, have climbed back up to $60.91.

Saudi Arabia has shouldered almost the entire burden. Its oil production is about 8.8 million barrels a day, well below capacity. Morse estimates that Saudi production is less than 8.6 million barrels a day, down from 9.2 million barrels a day earlier in the year. But Saudi Arabia doesn't want to be the swing producer while other OPEC members stay near peak capacity. And it isn't likely to get any help from Angola, which has asked to join OPEC next year but is expected to double its production to 2.8 million barrels a day over the next three years.

Despite the historically high prices, OPEC members want to keep collecting record revenues, which they have been using to buy support at home and influence abroad. Analysts say the cartel also wants to punish speculators who bet against the group's ability to prop up prices. And OPEC also wants to reverse the unusual situation in oil futures markets known as contango, when prices for future delivery are higher than for current delivery. That creates an incentive to build up inventories.

OPEC is also watching the weakening dollar. Oil is priced in dollars, meaning that OPEC countries buying goods in euros, yen or British pounds haven't received the full benefit of high prices.

Some OPEC members, notably Saudi Arabia, have feared in the past that excessively high prices could lower world consumption and spur the search for alternatives.

But Americans have shown a surprising appetite for gasoline despite high prices. In a report last week, the consulting firm Cambridge Energy Research Associates said that gasoline consumption rose about 1 percent in the first 11 months of this year, compared with 2005. The firm also noted that spending on petroleum products made up only 3.8 percent of the U.S. household budget in 2006. That was barely more than oil's share of household spending in the 1960s.

But many Americans have been jolted into attention. Today, a group of U.S. chief executives and retired military officers is to issue a report calling the nation's reliance on expensive oil imports from volatile areas a "critical threat" to economic and national security.

"If the country doesn't do something to reduce the amount of imported petroleum, we're going to have a very unpleasant economic correction or national security challenge in the years to come," said Frederick W. Smith, chief executive of FedEx. "You're going to have disruption in the Middle East. You can just see that coming."

Robert D. Hormats, a vice chairman of Goldman Sachs, said, "Everyone says that 9/11 changed everything. It surely has not changed our energy policy."