OPEC agrees to boost oil output

Prices hit record despite decision

September 12, 2007|By New York Times News Service

VIENNA, Austria -- The Organization of the Petroleum Exporting Countries sought to regain its authority over volatile oil markets yesterday, agreeing to increase production by 500,000 barrels a day. But prices still rose to a record.

At the same time, representatives of leading OPEC nations said they feared that a slowing global economy might dampen future demand. The oil cartel signaled that it would be ready to act swiftly to protect its members' interests.

The decision by members of the Organization of the Petroleum Exporting Countries came after an unusually long day of arguments about the size and the timing of the increase in production, intended to meet an expected surge in winter consumption and to push prices down.

While the rise in crude oil supplies would be modest, about 2 percent, the announcement still came as a surprise to many.

Some OPEC countries - including Iran, Venezuela and Algeria - had initially expressed strong opposition to an increase in supplies, and others feared that a mistimed decision to add oil to the market might backfire at a time of heightened economic concern.

But Saudi Arabia and other Persian Gulf nations brokered a deal during a seven-hour-long meeting here.

Analysts said Saudi Arabia, OPEC's de facto leader and the group's biggest supplier, did not wish to see oil prices rise above $80 a barrel. The production increase, the first official one in more than a year, will be effective on Nov. 1.

But the commodities market seemed to shrug off the decision as not significant enough. In New York yesterday, crude oil for October delivery rose 74 cents, to settle at a record $78.23 a barrel.

Oil-consuming countries, including the United States, have been urging OPEC producers to add output to the market, warning that winter was expected to bring a big rise in consumption that oil producers outside OPEC would not be able to meet. They warned further that high oil prices could put an additional drag on the global economy.

OPEC members were eager to stress that they were being responsible and responsive.

"Our message to consumers is that we care and we are concerned, and that is why we increased production," Abdalla Salem el-Badri of Libya, the group's secretary general, said at a brief news conference after the meeting.

Vera de Ladoucette of Cambridge Energy Research Associates, said: "The Saudis convinced other OPEC countries that $80 a barrel was a ceiling. They were really worried about contributing to the world economic crisis. They acted prudently."

`OPEC uncomfortable'

And David Kirsch, an oil analyst at the consulting firm PFC Energy, said: "OPEC is uncomfortable with a situation that takes control away from the fundamentals, and therefore from OPEC. The question they are wrestling with is that there are very short-term bullish pressures on prices, but longer-term question marks."

OPEC representatives said they were aware that excessively high prices might put a dent in a global economy that is already suffering from the weak housing market in the United States. Some oil ministers attending the meeting said they did not want to be blamed for worsening global economic woes.

"We think that the market is a little bit high," Kuwait's acting oil minister, Mohammad al-Olaim, said.

Yet OPEC also recognized the dangers that a slowing world economy posed to its business. Many ministers here feared repeating the mistake made in 1997 when the group increased supplies by 2.5 million barrels a day just as the Asian financial crisis was brewing. The result was a collapse in oil prices the following year, to $10 a barrel. That was deeply traumatic for oil producers, whose revenue was cut in half.

This time, the organization hinted that its members would keep close watch on the market and would be ready to act quickly if needed by cutting production if prices declined too much.

Wording of statement

In a carefully worded final statement, OPEC said it would be ready "to swiftly respond to any developments which might jeopardize oil market stability and their interests."

Analysts present in Vienna took that to mean that the producing countries would reduce production if prices were to decline too rapidly.

The organization is scheduled to meet twice before the end of the year: once in the Saudi capital, Riyadh, in November, at a meeting of heads of state; and again in December in Abu Dhabi in the United Arab Emirates.

Because of high demand, OPEC members had already been pumping more oil than their previous quotas allowed.

The 10 countries of OPEC's 12 that have been allocated a production quota - all except Angola and Iraq - pumped an average of 26.7 million barrels of crude oil a day last month, according an estimate by Bloomberg, or 900,000 barrels a day more than their collective target.

27.2 million barrels

The new production level raises the target to 27.2 million barrels a day.

As Jan Stuart, an energy economist at UBS in New York, put it, "For OPEC, the risk of doing nothing and seeing prices escalate seemed bigger than the risk of doing something and watching prices come off from it."

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