- The Washington Times - Wednesday, September 6, 2000

President Clinton is expected to press Saudi Arabia's Crown Prince Abdullah in New York today for increased oil production to head off what some analysts say could be astronomical prices for crude and heating oil this winter.

Mr. Clinton's meeting with the prince, scheduled as part of a stay in New York for the U.N. Millennium Summit, is the latest effort in a rare presidential lobbying campaign to influence key members of the Organization of the Petroleum Exporting Countries (OPEC) ahead of a meeting of the oil cartel on Sunday.

The price of crude oil continued to hover near record highs yesterday, closing at $33.83 a barrel in New York, despite widespread expectations that OPEC would heed pleas from the United States and Europe and approve a small increase in production of 500,000 barrels a day at the meeting.

Some analysts say supplies of oil are so low that a full-blown oil crisis could break out this fall with crude prices jumping to $50 a barrel unless oil supplies are dramatically increased. One move the administration reportedly is considering to prevent such an economic and political crisis is to release Strategic Petroleum Reserves, analysts believe.

"The risk of an oil price shock is unusually high," said Bill Dudley, analyst with Goldman Sachs & Co. in New York, which sees a one in 10 chance that tight supplies of oil worldwide and growing demand for winter fuel in the next six months could plunge the world into a 1970s-style oil crisis.

With world growth climbing close to 5 percent this year, the demand for oil may soon outstrip supply, he said, and even Saudi Arabia OPEC's biggest producer may not be able to turn the situation around. The Saudis can produce only about a million more barrels a day. Global demand currently runs to 76 million barrels a day.

"An oil price spike to $50 a barrel would represent an increase in oil prices of roughly the same magnitude as occurred in 1978-1979, but not as large as the 1973-1974 shock," Mr. Dudley said.

But the economist cautioned that any oil price shock is not expected to immediately hurt the U.S. economy, as occurred in the 1970s, because America's economy is far less dependent on oil now. The economy has grown by 130 percent since 1972, while oil consumption has grown only by 16 percent.

Still, Americans would face soaring prices for heating oil and gasoline, and the jump in inflation caused by surging energy costs would depress consumer spending and increase the risk of recession, he said.

"Undoubtedly, the risks of a hard landing would increase. After all, higher oil prices have been a precursor of the last three recessions," he said. "But we believe the Federal Reserve could avoid such an outcome."

Already, this year's surge in oil prices is causing protests and gas rationing in Europe. In France, truckers demanding a break from France's high gasoline taxes last weekend blockaded all the country's oil refineries, prompting several provincial governments to start rationing gasoline.

Protests against high prices and the accompanying high fuel taxes also have broken out in Spain, Belgium and Britain. After French fishermen blocked cross-channel ferry traffic between France and England last week, the government agreed to cut their fuel taxes. Now, French farmers and truck, taxi and ambulance drivers are demanding similar measures.

European leaders, and Mr. Clinton, are calling on OPEC to quickly raise production, warning that further delays could do substantial damage to the economies of Europe and to growth worldwide.

Mr. Clinton is urging the cartel to push prices back down to around $25 a barrel, a level he said will not threaten growth while enabling oil producers to continue to pump profitably.

Mr. Clinton will remind Prince Abdullah, America's strongest ally in the cartel, of their "mutual interest in a fair balance between production and demand that creates stability," said National Security Adviser Samuel R. Berger.

OPEC has talked about raising production by 500,000 barrels a day if its price benchmark stays above $28 a barrel for 20 days. That requirement is likely to be met on Friday, two days before the group meets in Vienna, Austria.

But OPEC may not be able to entirely rescue consumers from today's crunch, said Jay Saunders, oil analyst with Deutsche Banc Alex. Brown.

That's because the shortages being experienced here and abroad are of refined products like heating oil distillate and diesel fuel, not crude oil. U.S. and European refineries already are running full tilt to produce the refined fuels, and may not be able to use crude oil any more rapidly, he said.

Also, Middle Eastern producers like Saudi Arabia pump mainly heavy "sour" crude rather than the light "sweet" crude that is freer of pollutants and more in demand at the refineries, Mr. Saunders said.

"It's not clear that more oil is what the market needs now," he said.

Even a "politically motivated" decision by the administration to release some of the Strategic Petroleum Reserves may not relieve much of the pressure on the refineries, he said.

Still, an oil crisis would develop only if this winter turns out to be unusually cold and sends the demand for fuel soaring, Mr. Saunders said.

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