OPEC to Maintain Oil Output, Urges Nations to Meet Quotas
Monday, March 16, 2009
Facing a global recession and falling oil demand, the Organization of the Petroleum Exporting Countries reached a compromise yesterday in an effort to bolster oil prices without sending the world economy into a steeper decline.
The cartel, which produces more than a third of the world's oil, did not lower its current production targets, but said that it would push OPEC members who are not meeting their targets to carry out their pledges for output cuts. That could mean reducing as much as 800,000 barrels a day from current production, equal to about 1 percent of world consumption. But it could also mean little change if some members continue to overshoot their quotas. The group will meet again on May 28.
The stakes for the ailing global economy are enormous. Increases in oil prices resemble tax increases, draining cash from consumers' pockets and siphoning money out of struggling oil-consuming nations. With the world using more than 85 million barrels a day of petroleum products, every $10 a barrel increase in the price of crude oil adds $300 billion to the world's annual fuel bill; a $10 a barrel increase would be like a $85 billion a year tax increase for U.S. consumers.
OPEC oil ministers, who met for several hours in Vienna, are wary that a sudden increase in oil prices could choke any prospect of economic recovery, accelerate the drop in oil consumption and force OPEC to cut output even deeper. At the same time, many OPEC members are eager to prop up prices, which are more than $100 a barrel below the peak reached last July.
"We don't want to hurt the international economy, but at the same time we don't want to hurt ourselves," Sheikh Ahmad al-Abdullah al-Sabah, the Kuwaiti oil minister, told reporters when he arrived at the Vienna airport on Friday. "It is a very difficult equation."
And a politically sensitive one. President Obama talked to Saudi King Abdullah on Friday, but the White House said only that they discussed "the need to coordinate international efforts to restore economic growth." The United States also wants Saudi Arabia to help boost the International Monetary Fund's resources.
A Saudi government adviser said that the kingdom, which has invested conservatively and largely in U.S. Treasury bonds, now holds the world's third-largest foreign exchange reserves, had the world's third-largest trade surplus and was "key" to the Group of 20 summit. He said in an e-mail that the OPEC deal yesterday was designed "NOT to decrease production at present to safeguard the slow economic recovery and to send a clear signal to . . . Iran, Venezuela and Russia that they are not all powerful." All three of those countries, whose relations with the United States have been strained, were fortified by oil revenues last year.
Global economic recovery is crucial to boosting oil demand. At the same time, many OPEC members -- especially the populous nations of Venezuela, Iran and Nigeria -- are impatient to boost prices in order to meet their budget requirements. Several OPEC Gulf members, also hit by the financial crisis, have poured money into domestic financial institutions.
In its communique yesterday, OPEC stressed "its commitment to stabilizing the market, ensuring a regular supply of petroleum to consumers at price levels which are equitable not only for the world economy, for consumers but also to ensure adequate future supply."
The amount of unused oil production capacity has climbed substantially over the past year, from about 2 percent of world consumption to about 6 percent. The lower level was inadequate for meeting world needs if a geopolitical or weather event disrupted supplies from just one nation. Roger Diwan, an expert at PFC Energy, estimates that there are now 5.5 million barrels a day of idle capacity among OPEC countries.
The Saudi government adviser said that the kingdom's 4.5 million barrels a day of spare capacity gave it "massive . . . leverage over global oil markets."
Over the past six months, OPEC has steadily lowered its expectations of global oil demand. In the Friday report, it dropped its forecast for 2009 to show a small, 300,000-barrel-a-day contraction in oil consumption, down from its previous forecast of a 100,000-barrel increase. Since September, OPEC has lowered its 2009 demand forecast by 2 million barrels a day, with the slowdown affecting developing, as well as developed, countries.