Video: Crude constraints

updated 3/30/2004 3:24:55 PM ET 2004-03-30T20:24:55

The current high price of oil should not prevent OPEC from cutting its output target by 4 percent as planned, oil ministers said Tuesday.

Those arguing for pressing forward with the cut claim the world market is awash with crude — something that might surprise U.S. motorists who are paying record prices for gasoline.

Saudi Arabian oil minister Ali Naimi said the 11-member Organization of Petroleum Exporting Countries should stick with its earlier decision to trim its output target by 1 million barrels per day starting Thursday. Oil ministers from four other countries — Venezuela, Libya, Algeria and Iran — made similar arguments.

OPEC representatives were gathering in Vienna for informal talks on output policy before meeting formally on Wednesday. OPEC supplies about a third of the world’s oil. Its current output target is 24.5 million barrels per day.

No matter what it decides to do, OPEC faces an uncomfortable choice.

If the group follows through on its Feb. 10 agreement to cut its production target to 23.5 million barrels, it risks driving up crude prices toward the psychologically important threshold of $40 per barrel. That could damage the global economy and the long-term demand for oil, said John Waterlow, an analyst at Wood Mackenzie Consultants in Edinburgh, Scotland.

However, if the group postpones its promised cut, it may hurt its credibility and oversupply the market just as demand starts to slow in the second quarter. The result could be “a precipitous fall” in prices that everyone in OPEC wants to avoid, Waterlow said.

Prices are already uncomfortably high for importers and consumers. U.S. light, sweet crude reached a 13-year peak of $38.35 per barrel on March 17. U.S. crude futures for May delivery were trading Tuesday at $36.30 per barrel, up 85 cents, in New York. In London, May contracts of North Sea Brent gained 71 cents to settle at $32.45 per barrel.

U.S. Sen. Charles Schumer of New York urged President Bush to pressure OPEC to boost production in an effort to increase oil supplies and help U.S. motorists, who are paying record prices for gasoline.

But no matter what OPEC does Wednesday, it probably won’t provide any immediate relief at the pump. Analysts say the cost of crude is now a less important factor in U.S. gasoline prices than are the high consumer demand, limited refining capacity and concerns about possible shortages in blending components for reformulated gasoline.

“It’s unlikely that (U.S. gas prices) will be going down for a while,” Waterlow said. “There is still potential for spikes in the cost of gasoline in North America because of the tight supply-demand balance, regardless of crude prices.”

Although demand for oil in Asia and the United States has been unexpectedly strong, Naimi of Saudi Arabia blamed investors and speculators for pushing crude prices up to their highest levels since the 1991 Gulf War. Current prices “have absolutely nothing to do with supply and demand” for crude, he told reporters.

Libyan oil minister Fahti bin Shatwan sought to deflect criticism of OPEC by claiming that the recent plunge in the value of the U.S. dollar has inflated crude prices by about 30 percent. He claimed that the real value of barrel of oil is around $20.

“The supply is enough in the market. Maybe there’s a bit of oversupply even,” bin Shatwan said.

Most OPEC members are taking advantage of the high prices by pumping as much oil as they can. Excluding Iraq, which doesn’t participate in the group’s quota agreements, OPEC is exceeding its target by an estimated 1.5 million barrels.

Venezuelan oil minister Rafael Ramirez said his country supported the planned cut because “we have to defend our price.”

However, Kuwaiti oil minister Ahmed Fahd al-Ahmed Al-Sabah struck a more conciliatory tone as he left Kuwait to fly to Vienna. OPEC should postpone its production cut until it meets again in June, “unless there is an emergency,” Al-Sabah told reporters.

Obaid bin Saif al-Nasseri, oil minister for the United Arab Emirates, added that delaying the 4 percent cut in OPEC’s target would be “one option” under discussion.

OPEC agreed last month in Algiers, Algeria, to reduce its output ceiling starting Thursday, to try to keep prices from falling this spring. Although it has announced two cuts in its production target in six months, OPEC has boosted its actual output.

Peter Gignoux, an independent analyst based in London, said the market needs even more.

“We’re on the edge of an oil problem,” he said. “OPEC is facing a true dilemma: Do they create an oil price crisis, or do they use their influence to stabilize the price?”

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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