With oil prices painfully high, OPEC needs to pump more

The Outlook

February 27, 2000|By Amanda J. Crawford

Crude oil prices this month crossed the $30-a-barrel mark for the first time since the eve of the Persian Gulf war.

Prices have increased 166 percent since bottoming out at $11.37 per barrel last February, driven by production cuts OPEC instituted in the spring to buoy low prices, by unseasonably high demand and by the slashing of oil exports from Iraq.

The national average gasoline price also soared to more than $1.41 per gallon as of Feb. 18.

Pressure is mounting for the Organization of the Petroleum Exporting Countries to raise production quotas at its meeting March 27 in Vienna, Austria.

Should and will OPEC raise production quotas?

Will it work to lower prices?

Wilfrid Kohl

Research professor of international relations and director of the International Energy and Environment Program, the Johns Hopkins University's School of Advanced International Studies, Washington, D.C.

OPEC should raise production because oil prices really are now too high and are beginning to pose a threat to national economies and the world economies. The threat is that they could increase inflation, and have other negative macroeconomic effects. Potentially, they could contribute toward pressure for recession in some economies, though probably not in the U.S.

If OPEC does not expand production, they risk encouraging more exploration and production on the part of non-OPEC producers. They also risk encouraging other fuel and technologies, especially more energy efficiency, which in the longer run is going to reduce demand for their oil. This was the mistake OPEC made back when they promoted very high prices after the second oil shock in 1979-'80, as a result of which oil demand plummeted in the early '80s and they were no longer able to control the market. Probably, they will not make that mistake again.

Yes, it will lower prices with a little bit of lag time. It will have an immediate effect on the perception of the market, which will show up rather quickly on the oil futures market. But there will be a lag time of several months between the decision and the actual implementation and also because of the transport necessary to get crude oil to refineries and to markets.

Michael C. Young

Integrated oil analyst, Deutsche Banc Alex. Brown, Boston

The answer is yes. Basically OPEC is intentionally undersupplying world requirements for its oil, and, if the situation persists, prices are going to continue to move higher. Longer term, we don't think that it is in OPEC's interest to have oil prices above $30 per barrel. In fact, we think $30 per barrel is the magic number and that at anything above that level OPEC will look to increase production.

They've done this before and the problem historically with $30 oil is that, as you would expect, it curbs consumption and increases non-OPEC supply. I think that OPEC's long-term interests would be better served by a low $20 per barrel price range.

Increasing production will only help at the margin. It will take some steam out of the oil market, but we would be surprised if oil prices moved lower than $25 or $26 a barrel this summer. This is primarily due to the projected strength in U.S. gasoline prices this summer.

Bruce Lanni

Senior oil analyst, CI World Markets, New York

We think that OPEC is probably going to announce production increases at their March 27 meeting. We think they are going to be staged increases, and that the first increase will occur in the mid to latter second quarter. We anticipate an increase somewhere in the area of a million barrels a day. This will help to regulate prices and take out some of the volatility we see.

If OPEC doesn't step up to increase production, crude prices will continue to move higher. The reason for this is pretty simple: Supply demand fundamentals are tight, and the inventory levels have been brought down to close to historic lows. Given all that, it sets the stage for strong oil prices, especially considering that global demand growth is anticipated to be in the area of 2.5 percent, which compares to 1.6 percent last year.OPEC doesn't want to see prices much above the current levels. They have often stated that their preference is to have prices about $25 a barrel because they don't want to choke off global economic growth.

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