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World: OPEC Raises Output Ceiling, But Move Might Not Have Strong Impact

  • Mark Baker

OPEC oil cartel members yesterday decided to raise their collective output quota by around 10 percent in order to relieve pressure on prices. Oil prices did fall some after the announcement -- but it's uncertain how much of an effect the move will have since the cartel's members are already pumping in excess of the quota. RFE/RL's Mark Baker spoke to an oil expert in Cyprus who says, in any event, prices won't fall very far very soon.

PRAGUE, June 4 (NCA/Mark Baker) -- It's still uncertain what effect yesterday's decision by the Organization of the Petroleum Exporting Countries (OPEC) oil cartel to raise its collective output quota will have on the price of oil

The 11-member cartel, at a meeting in Beirut, decided to raise its quota by around 10 percent, to 25.5 million barrels a day. In addition, it pledged to raise the quota another 500,000 barrels a day in August.

Oil markets appeared to welcome the move. Following the announcement, the price of oil slipped below $40 a barrel. Earlier in the week, the price had reached a 21-year high of more than $42.

But it is questionable whether prices can fall much further since the decision to raise the quota won't actually lead to much more oil in the market. The reason is that OPEC members are already pumping in excess of the quota and -- aside from Saudi Arabia -- they don't have much spare capacity to pump more.

Gerald Butt is an oil analyst at the Cyprus-based "Middle East Economic Survey." Speaking to RFE/RL by telephone, he says yesterday's announcement was mostly "cosmetic."

"The increase that OPEC announced -- 2 million barrels a day in July and a half million in August -- is in fact a cosmetic exercise. It is legitimizing production that is already taking place. The OPEC states are producing above their quota to that degree. Therefore, in that respect, there's no more oil in the market," said Butt.

Oil prices have soared in recent weeks amid concern over unrest in the Middle East -- the world's biggest oil-producing region. Questions remain over the reliability of Iraqi supplies as the U.S.-led coalition fights an insurgency there. A recent terrorist attack in Saudi Arabia targeting the oil industry has raised fresh doubts over the security of that country's supplies.

Butt said security in Saudi Arabia -- the world's largest oil producer -- is key: "One has to remember that most of the OPEC states are already producing at their maximum capacity and really only Saudi Arabia has the ability to switch on the taps and put many thousands of extra barrels into the market overnight. Therefore, if there was any kind of disruption in Saudi Arabia, the world markets would feel the pinch -- they would feel an immediate shortage. So that, I think, is one of the major reasons why traders are nervous, why prices are so high. And, frankly, there's not a lot OPEC can do about that."

Venezuelan Oil Minister Rafael Ramirez yesterday admitted in effect that OPEC's ability to influence prices under the circumstances is limited. While other OPEC oil ministers in Beirut were highlighting the cartel's decision to raise output quotas, Ramirez interjected a note of realism.

"We have to do our best to put more oil in the market. OPEC has the commitment to put enough oil in the market. But clearly, the situation is that the geopolitical tension in the Middle East is a very important factor and it impacts the price of oil," Ramirez said.

Oil producers have come under increasing pressure to alleviate price pressures amid concern that higher oil prices will blunt a global economic recovery.

Economic projections in the United States, the European Union, and Japan had called for relatively strong growth this year, following several years of low or no growth. Economists have said that the current price of $40 a barrel is probably not high enough to reverse this recovery, but now they say that growth might not be as strong as expected.

OPEC's 11 members account for around one-third of the world's oil supply. The cartel's decisions to increase or withhold supply traditionally exert a strong impact on prices -- since most non-OPEC producers are already producing and selling as much oil as they can.

Experts say that even if the threat of terrorism were to diminish -- something not expected to happen soon -- there would still be strong upward pressure on prices. They say demand -- especially from the United States and China -- is rising and significant new capacity is months, if not years, away.
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