- The Washington Times - Thursday, June 3, 2004

OPEC yesterday moved to ease high oil prices by announcing a production increase of 2 million barrels a day starting next month, with an additional half million barrels coming online in August.

But the action had little impact on oil prices in a world that consumes 80 million barrels a day, and analysts said it was not enough to substantially reduce record-high gasoline prices in the United States this summer.

Meeting in Beirut, members of the Organization of Petroleum Exporting Countries sought to show their resolve to counter pressure that has driven up oil prices to records of more than $40 a barrel. A series of terrorist strikes on oil facilities and workers in Saudi Arabia and Iraq has fed fears of a disruption in oil supplies.

“We are very concerned about high oil prices,” OPEC President Purnomo Yusgiantoro of Indonesia told reporters in Beirut. “We are encouraging our member countries to do as much as they can. But we can only do so much. We are already producing at close to capacity.”

OPEC said that many factors beyond its control are driving up prices, including speculation and terrorist strikes, as well as greater demand than expected in the United States and China and limited refining capacity in the Unites States.

High gas prices are doing little to curb the rise in U.S. gasoline consumption, which accounts for a quarter of world demand. Yesterday, auto dealers reported that sales of gas-guzzling SUVs increased 9 percent last month.

“I can’t give you guarantees that oil prices will not go up” from levels around $40 a barrel, where they have plateaued since Saudi Arabia urged OPEC action last month, Mr. Yusgiantoro said. The price of premium crude oil fell 68 cents to $39.28 in New York trading yesterday.

One reason for skepticism about OPEC’s action is that its new official quota of 25.5 million barrels a day is nearly 1 million barrels less than what OPEC actually pumped last month, according to estimates from PetroLogistics Ltd., a Geneva company that tracks oil tankers.

OPEC output often is higher than officially acknowledged because members “cheat” and produce above their quotas to take advantage of soaring oil prices.

But analysts say Saudi Arabia, which this month increased production by nearly a million barrels, to 9.1 million barrels a day, will be the country to watch, because it alone has the capacity to pump an additional million barrels or more.

“We have signaled to our customers that if they need additional barrels, we will make them available,” said Adel al-Jubeir, Saudi Arabia’s foreign affairs adviser. “If prices are too high, customers are hurt, economic growth slows, demand for crude oil slows and the world economy is damaged.”

The United Arab Emirates and Kuwait, which can raise their output by smaller amounts than Saudi Arabia, will produce 400,000 barrels and 100,000 barrels more, respectively, under the OPEC agreement.

Iraq, which is not under the official quota system, potentially could pump a lot more oil. But sabotage of its oil facilities in the last year has prevented it from exceeding pre-war production levels of 2.7 million barrels a day. Last month, its output fell to 2.1 million barrels because of sabotage.

Yesterday, U.S. authorities in Iraq released $800 million in funding to devote to increasing production from Iraq’s battered oil facilities.

That infusion of money is not expected to start yielding more oil for many months.

Jason Schenker, economist at Wachovia Securities, said oil prices may continue to trend downward a bit as OPEC phases in increased production this summer. But he said U.S. motorists are not likely to notice much of an effect at the pump.

“An increase in summer demand, and the limited capacity of U.S. refineries to process additional oil into gasoline, almost ensure that there will be no major fall-off in price until after Labor Day,” he said.

Because OPEC failed to surprise investors and break the speculative spiral that has driven up oil prices, Mr. Schenker said hedge funds and other speculators may see the current lull in oil prices as an opportunity to invest more in oil contracts before prices swing back up again.

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