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OPEC cuts may crimp economy

OPEC producers Wednesday agreed a surprise cut in oil production that could raise fuel costs this winter. — By John W. Schoen
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Even though the world’s oil tank has been running low this year, OPEC ministers meeting in Vienna Wednesday voted to make a surprise cut in production quotas, amid signs that crude oil shortages are easing. The cartel’s fear, apparently, is that a steady increase in production from Iraq could force world oil prices lower. But some analysts believe that, as long as attacks continue on U.S.-led forces and the Iraqi oil industry, tight crude oil supplies will continue to put the squeeze on energy consumers.

With the loss of Iraq’s oil supplies to war and the lingering effects of labor strikes on Venezuela’s oil industry, world oil inventories have been running very low this year. But though supplies still remain tight, the shortfall has begun easing in recent months. In February, petroleum inventories were some 200 million barrels below normal levels, but that shortfall had cut to about 58 million barrels as of August, according to Merrill Lynch.

With shortages easing, oil prices have been falling from a high of $36 a barrel in February to the mid-$20s this month.


Now, with the rebuilding of Iraq’s oil industry underway and the expectation that more of that country’s oil will soon hit world markets, the Organization of Petroleum Exporting Countries decided to tighten the taps a bit to slow the supply build-up and keep prices from falling further.

“We don’t want the market to collapse on our heads,” said Rilwanu Lukman, Nigerian Presidential Adviser on Energy. “Stocks are rising and prices were falling and Iraq is on its way back, so wouldn’t you be cautious?”

News of OPEC’s production cuts — of about 900,000 barrels a day — bumped oil prices back up by $1.15 Wednesday to $28.28 a barrel. Gasoline futures prices also jumped, rising six cents on the New York Mercantile Exchange, on news of the OPEC cuts and the latest data showing tighter-than-expects gasoline supplies.

Gasoline prices hit record highs just before the Labor Day weekend, when the nationwide, average price for a gallon of gas at a self serve pump was nearly $1.74, according to AAA spokesmen Geoff Sundstrom. Since then, prices have been easing somewhat.

Though crude oil supplies have been extremely tight this summer, Sundstorm says much of the reason for high pump prices has nothing to do with OPEC.

“We had a pipeline break in the Southwest; we had a number of refiners go down for various reasons, and we had a number of tropical storms that caused temporary shutdown of refineries and distribution,” he said. “Absent those problems and weather patterns, we should see prices back down to $1.50 a gallon.”


With the summer driving season winding down, attention now shifts to the winter heating season. The news is a bit better for homeowners who use natural gas. After a bitter cold weather and tight supplies sent gas prices soaring last winter, a record buildup in inventories this summer has prompted industry experts to scale back 2004 price forecasts. Those forecast are still high — some $4.00-4.50 per million British thermal units — but down nearly 25 percent from the beginning of this year and well below predictions made last spring at the height of supply squeeze. Over the last five years, the average price has been about $3.20.

“Week after week, storage builds have been a lot bigger than the market expected. For consumers, things are looking reasonably optimistic,” said Don Murray, at Oklahoma-based consultants C.H. Guernsey & Co.

Since June, U.S. Energy Information Administration data show a record 1.4 trillion cubic feet of gas has gone into storage compared with a 1.1 trillion cubic feet average over the past 10 years. Total inventories have climbed to nearly 2.6 trillion cubic feet, just 4 percent below normal and up from a 50 percent gap in April.

But consumers who heat their homes with heating oil may not get a break this winter — especially if the weather turns colder than normal.

“Our real worry at this point is heating oil,” said Bill O’Grady, a commodities analyst at A.G. Edwards. “Total distilled inventories are normal, but heating inventories remain a bit tight. We’re going into the refinery maintenance season, which means refineries will be making less of all product. So if the weather turns cold, and turns cold early, heating prices could move higher.”

The supply-demand balance could also be upset if the economy starts growing more quickly than expected.

But much depends on whether American-led coalition forces and U.S. companies working to rebuild Iraq’s oil industry can meet the ambitious goal of restoring pre-war production levels by early next year.

Some analysts caution that, no matter how quickly that effort proceeds, Iraq’s oil industry remains vulnerable to crippling sabotage from pro-Saddam loyalists.


To counter the threat, the Bush administration wants to create a special force to protect Iraq’s oil industry and to deploy a rapid-reaction team to repair pipelines after terrorist attacks, according to a report by Reuters. The plan includes $60 million to train and equip an “oil infrastructure security force,” whose sole purpose would be protecting Iraq’s oil facilities. U.S. occupation authorities also want to spend $55 million to create a “quick reaction pipeline repair team” that would be dispatched to damaged pipelines within 96 hours after the site has been secured.

But some analysts believe that, even with those measures in place, Iraq’s oil industry will remain vulnerable to attack.

“It’s a pretty target-rich environment if you’re a terrorist,” said O’Grady. “It’s hard to defend pipelines: What are you going to do, put somebody every ten feet? Even if you did, those security forces would be very easy to infiltrate.”

Reuters contributed to this story.