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OPEC: Decision To Maintain Quotas May Raise Prices

  • Mark Baker

OPEC says it will not raise quotas on oil production in spite of a recent decision by Iraq to withdraw supply from world markets. The oil cartel justified the decision by saying oil stocks remain adequate and any decision to raise the output ceiling could spark a price drop. But some experts say OPEC's decision not to act now will lead to higher energy prices this summer, which in turn could nip in the bud any economic recovery in the U.S. and Europe. RFE/RL correspondent Mark Baker looks at the OPEC decision and the likelihood of higher energy prices.

Prague, 6 June 2001 (RFE/RL) -- Oil industry analysts say yesterday's decision by OPEC to maintain oil output at its current level could result in higher energy prices this summer in Europe and the United States.

They say the higher prices, in turn, could blunt a recovery in the world's two biggest regional economies. Economic growth has slowed dramatically in the United States in the past year, due in part to higher energy prices. Economic growth in Europe has also slowed, though not as rapidly as in the U.S.

Jens-Uwe Waechter, an oil analyst at Deutsche Bank Research in Frankfurt, warns that while oil stocks may be adequate for now, supplies will tighten during the summer, the peak driving season and the period when utilities traditionally place oil orders for the winter heating period.

"I assume that they [OPEC] will meet again in July and then they will find out that the market needs more oil, especially with wintertime coming up. Traditionally, it's the summertime when stocks are being rebuilt for the winter."

OPEC members yesterday decided to maintain oil output at 24.2 million barrels a day in spite of a decision by Iraq to halt exports over a disagreement with the UN Security Council. But the cartel said it would review the decision at an emergency meeting to be held in one month's time (3 July).

Iraq accounts for only 4-5 percent of total world oil exports and the 11-country cartel said it saw no reason now to raise output levels. OPEC members cited a lack of refining capacity, especially in the U.S. -- and not a lack of crude -- as the main reason for higher gasoline prices at pumps in the U.S. and Europe.

Before the meeting, Saudi Arabia, OPEC's biggest producer, said it would step in if necessary to raise output to maintain price stability. Iraq said it would stop exporting oil after the Security Council decided to extend the country's oil-for-food program by only a month instead of the usual six months. The council shortened the extension to allow more time to consider a British-U.S. proposal to overhaul sanctions imposed against Iraq since the Gulf War.

World oil prices rose on 4 June following the Iraqi announcement. Prices later fell after Saudi Arabia said it was willing to increase production to make up for any shortfall. Oil prices today were little changed. One factor may be that Iraq in the past has made similar threats to withhold oil without a corresponding rise in the price of oil.

Even if prices at gasoline pumps remain relatively stable, Waechter says that any decision to keep oil production in check will certainly slow economic growth. He explains:

"Europe, or Euroland, is mostly a net importer of crude oil, for example. That import bill will at least stay high for the time being and that means a large chunk of national income will be diverted to paying for the energy import bill instead of being spent on domestic consumption, for example, which is usually the main driving force of economic growth."

OPEC Secretary-General Ali Rodriguez told reporters after yesterday's meeting that the cartel's primary goal was to hold output levels and prices steady. "Our main interest is to maintain market stability. And we are going to do all that is necessary in order to maintain that stability."

OPEC's president, Algerian Oil Minister Chakib Khelil, added that cartel members were afraid of sparking a collapse in prices by taking what he called an "undue" decision to raise output immediately. Oil currently trades in the $28-$30-a-barrel range, but fell to as low as $10 a barrel as recently as two years ago.

The 3 July date for OPEC's next meeting is important. That's about when the Security Council is due to finish deliberations on the proposals to modify the sanctions regime for Iraq. It also marks the end of the period for which Iraq has said it would suspend exports to protest the proposals.