Oil price falls as Saudis vow to pump more

Increase of 500,000 barrels will be actual gain, not existing overproduction


WASHINGTON - In an effort to drive down record crude oil prices, Saudi Arabia, the world's largest oil producer, offered yesterday to increase its output by at least 500,000 barrels, to 9 million barrels a day, starting June 1.

In contrast to an earlier suggestion by the country that OPEC increase its quotas, the offer is important because it would truly add more oil to the market rather than simply formalizing existing overproduction by the group's members.

With global demand relentlessly high, oil prices rose above $40 a barrel in New York on May 11 and remained there until yesterday. Nearly all oil-producing countries are pumping at maximum capacity, and almost all the world's spare capacity is in Saudi Arabia.

The offer was made by the Saudi oil minister, Ali al-Naimi, at a conference in Amsterdam, the Netherlands, and confirmed by an official at the Saudi Embassy in Washington.

It shows the mounting concern - even among oil producers reaping a windfall from high prices - that oil has become so expensive and volatile that it could slow economic growth and encourage the development of alternative fuels, Saudi officials and oil experts said.

The price of oil fell on news of the announcement, settling at $39.93 a barrel for July delivery in New York yesterday. While that dip may signal that some oil traders believe that the Saudis can make good on their offer, the additional oil that could appear on the market might not be enough to push prices sharply lower.

"Over time, those extra barrels will make a difference," said Amy Myers Jaffe, senior energy adviser at the James A. Baker III Institute for Public Policy at Rice University in Houston. But Jaffe and other experts warned that Saudi oil takes about six weeks to arrive in the United States and make its way through refineries before reaching consumers, which may mute the effect on gasoline prices.

"We're trying to salvage the winter heating oil season now," Jaffe said. "We're not trying to salvage the gasoline season any more."

As the de facto leaders of the Organization of the Petroleum Exporting Countries, the Saudis tried to quell the oil markets about two weeks ago by announcing that they would suggest to OPEC an increase of its official quota by 1.5 million barrels a day.

Oil traders, however, dismissed that offer because OPEC members are already exceeding the official quota of 23.5 million barrels a day by about 2.2 million barrels, industry experts estimated, as they seek to cash in on the high prices. The old Saudi suggestion, then, would have only formalized part of the existing situation without releasing additional oil onto the markets.

But the latest announcement, while calling for an increase in the official quota by 2 million barrels a day, was considerably strengthened by the Saudi offer to pump more oil and to sell it to all comers.

Echoing Naimi's comments in Amsterdam, Adel al-Jubeir, a spokesman for the Saudi Embassy in Washington, said his country would increase its output to at least 9 million barrels a day by June 1. The country is pumping about 8.5 million barrels a day now, industry analysts said, and has the capacity to produce about 10.5 million barrels a day on a sustained basis.

The increase in the official OPEC quota is expected to be discussed by the cartel's members at an international conference in Amsterdam over the weekend.

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