By Steven Mufson
Washington Post Staff Writer
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.
OPEC said in its Friday report that developing countries "have been the sole contributor to oil demand growth since 2006." It added, "China, the Middle East and other Asia [nations] were the pillars behind last year's oil demand, however due to the spillover of the economic downturn, these regions are no longer initiators of high growth to world oil demand."
Paul Ting, an independent oil analyst, said last week that Chinese oil demand in the first two months of 2009 was down 9.7 percent from 2008. Chinese oil inventories grew for the ninth straight month, he said.
China's dwindling appetite for oil has hurt exporters. China has been Angola's single-largest export market. But according to the Argus Global Markets newsletter, Angola's crude shipments to China have dropped 30 percent since November, and prices are less than half last year's average.
Nonetheless, as it did in early 2007, OPEC has demonstrated its ability to stabilize oil prices. Since September, it has vowed to cut output by 4.2 million barrels a day, and analysts estimate that members have carried out about 80 percent of those reductions.
In doing so, the 12-member cartel has steadied oil prices at more than $40 a barrel. A representative basket of the cartel's oil exports -- which include different qualities of crude oil -- have averaged $41.74 a barrel this year, after dipping below $35 in December.
"They've probably already done enough," said Adam Sieminski, head oil analyst at Deutsche Bank Securities.
Barclays Capital commodities analysts said in a report last week that U.S. petroleum inventories were no longer building beyond seasonal patterns, another indication that prices might stabilize. Barclays's analysts also expect that steeper drops in non-OPEC output because of weak investment and natural field declines in Britain, Mexico and Russia could ease pressure on OPEC.
All the same, Barclays said "the potential remains for another sharp pullback, particularly on the back of any further flow of particularly negative macroeconomic news."
OPEC members have argued that very low prices will undercut exploration projects and will therefore lead to future shortages.
"Crude oil prices are at levels that do not support sound investment strategies for the future. If this continues for much longer, the boom/bust cycles will continue for years to come. We would all suffer, if this happened -- producers and consumers alike," José Maria Botelho de Vasconcelos, Angola's minister of petroleum and the current president of OPEC, said at the opening of yesterday's session.
Indeed, exploration and production drilling has tumbled in recent months. The number of natural gas development rigs in operation is at a five-year low, down more than 40 percent since October. The level of oil drilling is 27 percent lower than a year ago, according to Barclays.
Many oil executives say they can't tell where prices are heading. But ConocoPhillips chief executive James Mulva said last week that oil prices would average $40 to $50 a barrel this year but that he expected them "to move up into the neighborhood of $60 to $70 a barrel for the next five to 10 years after that."
Traders on the New York Mercantile Exchange expect a slow but steady increase in oil prices over the next two years. On Friday, the price for oil for delivery in June 2011 was $60 a barrel.
Yesterday's OPEC compromise represents victory for Saudi Arabia, OPEC's biggest producer. The kingdom had pressed fellow OPEC members to live up to their promised output cuts. Saudi Arabia is responsible for half of OPEC's total production cuts since September, though it accounts for a third of the group's output, notes Edward Morse, oil expert at LCM Research. Nigeria and Iran, by contrast, have made only half their promised production cuts.
"We decided to leave this unchanged, and now it is time to fully adhere to the cuts we agreed upon," said Qatari oil minister, Abdullah Bin Hamad al-Attiyah.
Angola has also been producing more than its quota, in part because of new offshore fields that were planned before the West African nation joined OPEC in 2007. Argus Global Markets said that 185,000 barrels a day of new production is scheduled to start up this year.
Iraq is the only OPEC member that does not have a quota.