- The Washington Times - Wednesday, July 12, 2000

The average price of gasoline in the United States could drop back to around $1.50 a gallon by the end of the summer if Saudi Arabia makes good on its pledge to increase oil production, analysts say.

The world's largest oil exporter stunned motorists and oil experts alike last week by announcing plans to pump another 500,000 barrels of oil a day apparently before consulting with the other 10 members of the Organization of the Petroleum Exporting Countries.

Since that time, OPEC members like Venezuela have expressed their opposition to the plan, with only Kuwait and the United Arab Emirates agreeing. As recently as June 21, OPEC members had agreed to increase production by only 708,000 barrels to 25.4 million barrels a day.

The dispute has prompted speculation about whether the Saudis who, as the top producer, dominate the cartel will go ahead and pump the oil in defiance of the rest of OPEC. Most analysts say the Saudis want to smooth over tensions within the group before acting.

But any decision to open the tap could come as a welcome rain shower in a summer heat wave for U.S. drivers. Analysts say the average price of regular, self-service gas could drop quickly from a little more than $1.59 today to the $1.50 range. A reduction of that magnitude is likely to happen anyway, they say, after the summer driving season ends.

"If Saudi Arabia and the rest of OPEC come up with another 500,000 barrels a day, that would definitely have a visible and significant impact on prices. It would hit the gasoline pump fairly quickly," said John Lichtblau, analyst with PIRA Energy Group in New York.

The pressures on gasoline prices already are easing. After shooting up to more than $2 a gallon in parts of the Midwest in early June, the average price of gasoline nationwide has declined for three consecutive weeks. Crude oil prices dropped right after the Saudi announcement and were at $29.70 a barrel yesterday on the New York Mercantile Exchange.

Gas prices will be down significantly after Labor Day, in any event, because the Environmental Protection Agency's requirements for reformulated gasoline which caused the especially sharp price spike in the Midwest were designed for the summer peak-driving season and will be lifted on Sept. 1, Mr. Lichtblau said.

"For a variety of reasons, I think gasoline prices have peaked and are more likely to be lower" for the rest of the year, he said.

But Americans will not see the record low prices near $1 a gallon they enjoyed in 1998 anytime soon, he said. Even with the recent price declines, gas and crude prices remain 50 percent above those lows.

"It's a shock to the American consumer" and has caused considerable grousing and political debate, Mr. Lichtblau said. "Still, the economy's in good shape. People have the money and will not curtail their driving right away."

Jay Saunders, an oil analyst with Deutsche Banc Alex. Brown in Baltimore, said he expects gas prices to fall toward $1.50 a gallon by the end of summer, especially if the Saudis open the spigot.

This summer's high gas prices stem mostly from shortages at refineries, which have been loath to stock up on crude oil at today's high prices. The refineries let their inventories of gasoline fall to drum-tight levels as they awaited lower crude prices, he said.

The EPA's strict clean-fuel regulations came in the midst of an already tight market and made supplies of the reformulated gasoline even harder to get, he said.

To meet the stiff environmental standards, refiners have been demanding less polluted, low-sulfur oil or "sweet crude" which is less plentiful than the heavy crude produced in the Middle East.

Sweet crude is produced mainly in the North Sea, western Africa, Colombia, Texas and in other parts of the United States. Prices for such high-grade crude are running about $2 a barrel higher than heavy Middle Eastern crude.

Given the tight market for the best grades of crude and gas, Mr. Saunders said, gas prices remain vulnerable to spikes caused by disruptions of supply or other factors like the clean fuel regulations.

"What refiners are looking for is sweet barrels to make gasoline. This underlying reason is not just a problem in the Midwest anymore, it's a problem everywhere," including in Europe, where gas prices also have gone sky-high, he said.

"Whether its an earthquake, a patent dispute, new product specifications or a pipeline disruptions, inventories are low and you will see a strong reaction to any disruption of supply," he said.

Mr. Saunders said some doubt remains that the Saudis actually will increase production, since they have backed off similar plans in the past.

Any unilateral move by the oil giant would threaten the newfound unity and clout wielded by OPEC since it agreed for the first time in a decade last year to curb production and drive up prices.

Nauman Barakat, vice president at ABN Amro Inc. in New York, said OPEC is simply trying to keep up appearances.

"The more they talk, the more it will look like something OPEC wants instead of being simply railroaded by the Saudis," he said. "It's a done deal. The question is how soon."

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