- The Washington Times - Friday, May 21, 2004

Oil prices plunged below $40 a barrel yesterday, signaling that relief at the gas pump may soon be on the way, after Saudi Arabia announced it would start producing 8 percent more oil next month and urged OPEC to raise its output by a similar amount.

The price of premium crude dropped nearly a dollar to $39.93 in New York trading after closing at a record high of $41.55 Monday. The slide in price helped spur a rally on Wall Street as fears eased that record high oil prices would stoke inflation and crimp economic growth.

“This increase in oil production is necessary to maintain stability in the market and growth in the world economy,” said Prince Bandar bin Sultan, Saudi Arabia’s ambassador to the United States. The Saudi move comes after concerted calls for an increase from the United States and other oil-consuming nations.

“Saudi Arabia has been and will continue to be a strong and reliable energy partner, and we are working to bring prices down for consumers,” the Saudi ambassador said.

The kingdom is the world’s largest oil producer. Its increase in production starting June 1 to 9 million barrels a day from 8.35 million barrels puts it far in excess of the official quota of 7.63 million barrels assigned last month by the Organization of the Petroleum Exporting Countries.

Since Saudi Arabia is the only OPEC member with the capacity to substantially raise production even further, its move yesterday puts it in a strong position to push through the 2 million-barrel-a-day increase that it has proposed the full cartel adopt on June 3, analysts said.

OPEC produces about one-third of the world’s oil.

“It is a good step,” said Claude Mandil, the head of the International Energy Association, as world energy ministers arrived in Amsterdam for an energy forum. “Saudi Arabia recognizes that supply matters, plays a role in the present situation, and that high prices can hurt the economy.”

But Mr. Mandil told reporters that oil prices need to fall more to provide consumers with the relief they need to buoy the world economy. “We need more than one dollar,” he said.

Analysts said yesterday’s drop in oil prices was tentative because investors and traders remain skeptical, both about whether OPEC would approve the proposed increase and whether it would make much of difference in a tight world market.

OPEC members, who frequently “cheat” to take advantage of high prices, already are pumping more than 2 million barrels a day above their official quotas, with little effect on oil prices.

Spiraling demand for oil in the United States and China has been driving the 30 percent rise in oil prices this year, along with limited refining capacity for gasoline in the United States and unrest and terrorist threats in Iraq and Saudi Arabia.

“I don’t think that control is in OPEC’s hands,” said Obaid al-Nasseri, oil minister of the United Arab Emirates. “There are many factors behind these prices.”

The UAE and Kuwait, both comparatively small producers, are the only other OPEC members with the capacity to raise output currently. Kuwait has endorsed the Saudi proposal, and Mr. Nasseri has said he would support the production increase if the rest of OPEC approves.

“An unequivocal signal from OPEC could help calm the markets a bit, but there are all sorts of other issues influencing the price this time,” said John Waterlow, an oil analyst at WoodMacKenzie.

“We also have to bear in mind that the peak season for gasoline demand in the United States is yet to come and there is no sign of any immediate relief to that problem,” he said.

The average price of regular self-serve gasoline already is up 50 percent to record levels over $2 a gallon before the start of the peak summer driving season next weekend.

One reason an OPEC production increase might not provide much immediate relief for U.S. drivers is that the kind of oil produced by OPEC is mainly crude heavy in sulfur, which cannot be used by many refineries to make the clean fuels needed to meet environmental requirements for summer gasolines in the United States.

Also, oil shipped from the Middle East takes six weeks to reach U.S. refineries, so it would not arrive until the summer is half over.

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