- The Washington Times - Thursday, May 27, 2004

Signs that OPEC may move next week to aggressively increase oil production caused a plunge in oil prices yesterday, raising hopes that prices at the pump will follow.

The easing of oil prices comes amid evidence that record-high fuel costs have had little impact on the U.S. economy. Growth picked up to a strong 4.4 percent in the first quarter despite climbing fuel prices, the Commerce Department reported.

World leaders, in urging producers to pump more oil, have warned that high oil prices could start to hurt growth. But in the United States, the world’s largest market for oil, the main impact so far has been to stoke inflation, which nearly tripled to a 3 percent rate from the fourth quarter of last year, Commerce said.

Crude oil prices dropped 3 percent to $39.44 per barrel in New York trading yesterday after the president of the Organization of Petroleum Exporting Countries said the cartel is eyeing a “significant” increase in production to try to break the market psychology that has driven oil prices up to records near $42 per barrel this year.

An “option” at the cartel’s June 3 meeting in Beirut “is to increase the quota significantly so it will bring a significant psychological impact to lower prices,” Purnomo Yusgiantoro told reporters in Jakarta, Indonesia, where he is oil minister.

Energy Secretary Spencer Abraham, who is traveling in Europe, predicted that OPEC would adopt the 2 million-barrel-a-day output increase recommended by Saudi Arabia last week.

Mr. Abraham said major non-OPEC producers like Mexico and Russia are scrambling to increase production to meet growing global demand for oil. Their efforts are expected to start paying off with substantial increases in oil supplies in 2005 and 2006.

But in the short run, only OPEC — primarily Saudi Arabia — is in a position to flood the market with oil.

Polls show the public does not blame OPEC or President Bush for high oil prices so much as “price gouging” by oil companies and the Iraq war.

A Gallup poll this week found that 22 percent of people interviewed blamed profiteering by big oil companies, and 19 percent blamed the war in Iraq. Only 9 percent held OPEC responsible, by contrast, while 5 percent blamed President Bush.

Analysts say prices could drop dramatically if OPEC — which produces about a third of the world’s oil — were to succeed in breaking market psychology and forcing out speculators who have been betting on climbing oil prices.

Sung Won Sohn, chief economist at Wells Fargo & Co., said speculation centered on potential supply disruptions in the Middle East has driven up the price of oil by as much as one-third, or $10 to $15 a barrel.

Proof that hedge funds and other speculators are having a powerful influence on oil prices is seen in the trading patterns of oil futures contracts on the New York Mercantile Exchange.

Recently, contracts betting on further increases in oil prices outnumbered contracts betting on price decreases by four to one, Mr. Sohn noted.

That may be changing, however, as the number of contracts betting on price increases dropped by 15 percent in the week ended May 18, according to figures kept by the Commodity Futures Trading Commission.

Doug Leggate, an analyst at Citigroup Inc., said oil prices would be $10 lower, and could fall precipitously, if speculators dropped out of the market.

“Speculators have been driving the market since the end of the Iraq war,” he said. Price drops could accelerate because speculators “follow momentum” and will quickly exit the market once upward price momentum fades, he said.

While gasoline prices generally can be expected to follow any major move in oil prices, some analysts say the impact on prices at the pump could be limited because U.S. refineries have little room to increase production of gasoline even if they get more oil from Saudi Arabia.

A report yesterday from the Energy Information Administration refuted that view, however, saying the 10 percent increase in production announced by the kingdom “could contribute to lower prices.”

“It would undoubtedly have been more beneficial” if Saudi Arabia had acted earlier, the report said, since shipments of oil take six weeks to reach the United States and could not arrive until the peak summer driving season is half over.

A report from the General Accounting Office yesterday lent some credence to charges that manipulation by oil companies — in particular, a wave of mergers and acquisitions since the 1990s — has helped to drive up the cost of gasoline.

Industry consolidation has curbed supplies of lower-priced generic gasoline, the report found, while it has added 1 or 2 cents to the price of a gallon of regular gas.

The biggest impact has been on states such as California that go beyond federal environmental requirements in mandating the cleanup of fuels. Prices for California’s “boutique” gasoline brands are 7 cents a gallon higher because few refineries are able to fulfill the special requirements, the report said.

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