- The Washington Times - Friday, April 25, 2003

OPEC decided at an emergency meeting yesterday to contend with a looming oil glut by curbing production, but crude still traded lower yesterday in New York.

A recent fall in prices, from more than $30 a barrel a week ago to as low as $25.61 yesterday, promises to benefit consumers and the struggling economy. Oil closed at $26.64 yesterday on the New York Mercantile Exchange.

The fall in oil prices came as the Organization of the Petroleum Exporting Countries decided to curb production by 2 million barrels a day to take into account increased supplies from Venezuela, Nigeria and Iraq, where stoppages are on their way to being resolved.

U.S. commanders in Iraq declined to send representatives to the OPEC meeting. But the coming surge of oil from Iraq, which holds the world's second-largest reserves, was in the background at the meeting in Vienna, Austria.

Damage to Iraq's oil wells and other war-related delays have prevented the country from resuming its exports of 2.5 million barrels a day. But the nation has the potential within a few years to rival Saudi Arabia in its influence on world oil supplies and prices.

"Resurgent Iraqi oil production could lead to $15 a barrel," said Lawrence Kudlow, economist with Kudlow & Cramer, citing a range for oil prices that helped to fuel the economic boom of the 1990s.

Mr. Kudlow said estimates of Iraq's daily production could rise to 8 million barrels, or about 10 percent of world production. Should Iraq continue to boycott OPEC under U.S. influence, its control over such a large share of production would threaten the cartel's ability to control prices and could altogether destroy OPEC.

"Think of it. And think of the positive implications of this possibility for stocks and the economy worldwide," he said.

The fall in oil prices last month to about $30 from nearly $40 in February, as coalition troops moved toward victory in Iraq, gave a boost to stocks and the economy. But apparently it was not enough to jolt businesses and consumers out of the spending stupor that has hampered growth, analysts say.

Businesses have actually cut hiring since the war ended, prompting a jump in new claims for unemployment benefits to 455,000 last week, the highest level in a year.

The steady fall of oil prices since the United States deposed Saddam Hussein has stimulated consumer confidence and spending, but it has yet to bolster business confidence in a way that would reverse the employment decline and pull the economy out of its slump.

Diane Swonk, chief economist with Bank One, said it is only a matter of time before businesses and the stock market respond to the drop in oil prices, which will undoubtedly help corporate executives hold down costs and pump up profits.

"The mood in New York needs to be broken by the proof of the pudding," and that will come when businesses see strong and consistent profit gains again, she said.

Information filtering in about the economy in the past two months shows that it had a near-death experience, in part because of the sudden and sharp spike in oil and other energy prices to sky-high levels in the weeks preceding the war.

Prices surged out of fear that a U.S. invasion of Iraq would not only cut off that country's production, but also threaten the output of critical nearby producers such as Kuwait and Saudi Arabia.

Oil prices dramatically declined, however, once it was clear that those nearby supplies were not endangered and that the sabotage of Iraq's wells was minimal.

In view of the powerful effect of a return of production in Iraq, analysts said yesterday's move by OPEC to trim production from 27.4 million to 25.4 million barrels a day was not drastic enough to prevent a further slide in oil prices.

"It's not enough to stop a supply glut," said Michael Rose, director of trading for Angus Jackson Inc. He said prices may fall well below OPEC's $25 target, depending on how fast Iraqi exports return.

Given the profits oil producers have raked in this year as the result of high prices, many analysts question whether the cartel will be disciplined enough to stick to its self-imposed limits.

"OPEC often says one thing and does another," Mr. Rose said. "I think they will have a hard time getting all members to actually cut. They have a history of cheating."

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