OPEC unveils surprise oil cut

Output would be lowered 2.5 million barrels a day

Crude price jumps in New York

White House warns of economic effects

February 11, 2004|By Robert Manor | Robert Manor,CHICAGO TRIBUNE

OPEC said yesterday that it would cut oil production, sending crude prices higher and drawing a warning from the White House that world economies could be destabilized.

The deal would trim production by 2.5 million barrels a day, or roughly 10 percent, effective April 1. The goal, according to the Organization of the Petroleum Exporting Countries, is to prop up prices, which members expect to begin falling this year.

The surprise announcement drove the price of crude oil futures up $1.04, or 3 percent, to $33.87 a barrel in New York.

The move underscores OPEC's desire to pre-empt increased production by oil producers that aren't members of the cartel, such as Russia and Norway, which might cause oil prices to decline.

"We don't want to see a precipitous fall in prices," Saudi Oil Minister Ali al-Naimi told the Associated Press.

U.S. officials are fearful that any surge in fuel costs could slow economic growth in the United States, the world's largest energy consumer.

"It is our hope that producers do not take actions that undermine the American economy ... and American consumers," said a White House spokesman.

Treasury Secretary John Snow called any decrease by OPEC producers "regrettable," and said it would effectively be a tax on American consumers.

Snow, speaking with reporters in Florida, said energy costs are not as significant a percentage of U.S. economic output as in the past, but he added that "energy price increases are certainly not welcome." Some analysts say the markets might be overreacting.

OPEC is not as dominant as it was a generation ago. It accounts for about 30 percent of the world's petroleum production, down from 50 percent at its peak.

Moreover, it is uncertain whether OPEC's 11 member nations will adhere to the goal. In the past, it has been routine for one or more OPEC countries to greatly exceed their quotas.

"By the fourth quarter, supply will be higher than it was in the first quarter" of the year, said Joanne Shore, senior analyst for the Energy Information Administration. "The crude prices we have seen at the beginning of the year would ultimately relax a bit as we continue on through the year."

She said her agency had closely estimated OPEC's cut and predicted in a forecast issued yesterday that prices for petroleum will rise a bit as summer approaches, then begin a gradual decline.

OPEC last cut production in September, by 3.5 percent. Prices rose as the invasion of Iraq neared. But oil prices declined sharply after Baghdad fell, falling as much as $9 a barrel in a couple of weeks.

Oil prices could rise as the year goes on. If that happens, some industries will suffer more than others. The airline industry, for example, is sensitive to the price of jet fuel, and fuel typically is the second-highest expense for trucking companies, after payroll.

Some energy observers are more cautious than the government, saying time is needed to see where oil prices will go.

Phil Flynn, an energy analyst for Alaron Trading Corp. in Chicago, said he thinks OPEC's moves are "definitely going to keep the prices of crude oil strong. Last year, we averaged the highest prices we have had in decades."

George Gaspar, oil industry analyst for Robert W. Baird, an investment bank that manages wealth for clients, said OPEC members will produce above their quotas, as they have in the past.

"There is going to be a lot of leaking of production," he said, using the term for cartel members exceeding quotas.

The Chicago Tribune is a Tribune Publishing newspaper. Wire services contributed to this article.

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