- The Washington Times - Tuesday, May 18, 2004

Energy Secretary Spencer Abraham yesterday said he will urge OPEC ministers at a meeting this weekend to pump more oil, the administration’s first gesture this year to show it is trying to do something about record-high gas prices above $2 a gallon.

Mr. Abraham said the administration would not stop filling the Strategic Petroleum Reserve to relieve pressure on oil prices, insisting those reserves may be needed in case an emergency disrupts U.S. oil supplies.

His comments come amid signs that the world’s oil supplies — and U.S. gasoline supplies in particular — are tightening.

The Organization of the Petroleum Exporting Countries is considering a 1.5 million-barrels-a-day increase in production, proposed by Saudi Arabia, which would help reduce oil prices.

U.S. oil futures fell $1.01 yesterday from record highs on the news that OPEC may boost output. U.S. light crude futures settled at $40.54 per barrel after closing at $41.55 per barrel Monday.

Also impacting oil prices yesterday was news that exports from Iraq were set to increase. A key pipeline in southern Iraq was repaired following a May 9 attack by saboteurs, returning to prewar production levels of about 2 million barrels a day.

Meanwhile, Iraqi oil officials told Agence France-Presse that the country expects to sell 6 million barrels next week from Iraq’s main oil center in Kirkuk.

Mr. Abraham said he would discuss the proposal with the Saudi minister at an international energy conference in Amsterdam this weekend. OPEC is due to decide June 3 whether to go ahead with the increase, which is supported mainly by U.S. allies on the cartel.

Mr. Abraham said he will warn OPEC of the harmful impact on world growth from “tight markets and high prices.”

But with nearly every oil-producing nation except Saudi Arabia producing near capacity, analysts say any move by OPEC to unleash spare production could come close to tapping out global oil supplies.

That would leave the world with no spare cushion and vulnerable to serious disruptions by terrorists this summer, as well as more mundane stoppages caused by bad weather or striking oil workers, as in Nigeria and Venezuela last year.

“There are serious questions about the cartel’s ability to pump much more oil,” said Edward Yardeni, chief investment strategist with Prudential Securities.

Global production now totals about 79 million barrels a day, with about a quarter of that going to the United States. Saudi Arabia estimates its spare daily capacity at between 1.5 million and 3 million barrels.

The sharp rise in the price of oil this year probably is due in part to the risk of shortages resulting from “the tremendous potential demand in China and the rest of Asia,” Mr. Yardeni said.

Roger Diwan, director of global oil markets for PFC Energy, said that even tapping out Saudi Arabia’s reserves might not lower the $8 to $9 a barrel “premium” markets have added to oil prices this year because of the shortage of supplies and political turmoil in Iraq and Saudi Arabia.

“Oil prices will go down a little bit, but the perception of risk actually will increase because you will be running the world with less excess capacity than you have right now,” he said.

Legendary Texas oilman T. Boone Pickens yesterday, in a Bloomberg interview, predicted that the combination of dwindling supplies and strong demand will soon drive oil prices to $45 a barrel.

In view of the treacherous supply situation, he said the administration is right to keep stowing away emergency reserves.

“We’re already so tight around the world, something is going to happen,” he said.

Energy analysts say suspension of shipments into the petroleum reserve likely would help to lower the price of oil by a few dollars, a possibility Mr. Abraham seemed to acknowledge.

“If there’s more oil on the marketplace, it’s going to have a downward pressure on prices, and perhaps a disproportionate one because of the fact that it would signal a change of policy,” he said.

But Mr. Abraham mostly blamed high oil prices on OPEC, which cut daily production by 1 million barrels last month despite evidence of growing demand. OPEC made its move because in the past, demand usually dipped in the spring.

While OPEC is nearing a ceiling on how much oil it can produce, U.S. refiners also are bumping up against their limits in their race to produce the highly refined gasolines needed to satisfy American demand during the peak summer driving season.

Refiners are able to produce less gasoline from each barrel of oil as a result of an environmental regulation that went into effect May 11 to curb sulfur emissions from diesel fuels. The Environmental Protection Agency estimates that rule is adding about 7 cents a gallon to pump prices.

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