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World: OPEC Had To Increase Production

The decision by the Organization of Petroleum Exporting Countries (OPEC) to increase production is certain to mean lower prices for gasoline worldwide. The question is whether those prices will fall quickly and dramatically. Another question, according to RFE/RL's Andrew F. Tully, is whether OPEC raised production to appease its customers -- or acted in its own self-interest.

Washington, 30 March 2000 (RFE/RL) -- The administration of U.S. President Bill Clinton is expressing relief over the decision by the Organization of Petroleum Exporting Countries (OPEC) to raise production levels.

But Clinton's opponents in Congress and elsewhere call the increase negligible. And some even say that putting pressure on OPEC to raise production is ultimately meaningless -- and even counterproductive.

Still other observers contend that ultimately, OPEC acted in its own self-interest.

Oil ministers of the 11 OPEC member states, meeting in Vienna, agreed early Wednesday to increase its production ceiling by 1.7 million barrels a day beginning in April.

The U.S. had urged OPEC to increase production by 2.5 million barrels a day. Iran, meanwhile, expressed resentment at American pressure by resisting any production increase altogether.

Two U.S. allies in OPEC -- Saudi Arabia and Kuwait -- persuaded most of the other members to approve what they saw as a more moderate price increase. Both nations were protected by the American-led military coalition during the 1991 Gulf War.

OPEC ordinarily operates by consensus, so Iran's opposition made it difficult for the oil cartel to announce the agreement. A majority accord was reached Tuesday evening, but it was not until the pre-dawn hours of Wednesday that OPEC could issue its communique. Several hours later, Iran announced that it had reluctantly agreed to join in the production increase.

On Wednesday morning, U.S. Energy Secretary Bill Richardson called the OPEC production increase "good news." Hours later, Clinton conducted one of his infrequent news conferences, where he, too, welcomed the cartel's decision.

"Yesterday's announcement that OPEC members will increase oil production is good news for our economy and for the American consumer. These increases should bring lower prices which will help to sustain economic growth here in America and also, and very importantly, throughout the world."

Hours earlier, one of his opponents in the U.S. House of Representatives, Congressman Frank Murkowski (R-Alaska), chided Clinton for his energy policy, and warned that consumers around the world should not expect a quick or dramatic fall in prices.

Murkowski held his own news conference, where he pointed out that many OPEC member states had been cheating -- producing more oil than allowed under OPEC ceilings. Therefore, he said, the net increase in OPEC oil that the world can expect is about 500,000 barrels a day -- less than one-third of the 1.7 million gallons officially called for.

George Beranek is an analyst at Petroleum Finance Company, a Washington petroleum-consulting firm. He agreed that there has been cheating based on the latest production figures from February.

"OPEC itself estimated February overproduction at 1.2 million barrels a day. We put it closer to 1.5 [million barrels a day]. So, you know, the higher the February overproduction was, the smaller the incremental supply addition in April."

But Beranek told RFE/RL that the cheating will continue. Therefore, he said, he expects a net production rise of about 1 million barrels of oil a day. Beranek said this will include a production increase by Mexico. Mexico is not an OPEC member, but it sets production and pricing in tandem with the oil cartel.

Jerry Taylor is an expert on energy and natural resources, who wrote the 1999 book "Earth Report 2000: Revisiting the True State of the Planet." He argued in a recent commentary (March 13) in The Wall Street Journal that the West should not use the specter of a worldwide recession in trying to pressure OPEC to lower prices.

Taylor wrote that most OPEC countries have only one internationally traded commodity -- oil -- and therefore they would not be economically hurt by a global recession like those of the 1970s. Therefore, he contended, OPEC has no incentive to raise oil production and thus lower prices.

Beranek disagrees. He says the decision to increase production was in OPEC's best interest.

"When we saw high prices in the 1970s -- high prices that stuck around for a long time -- they [high prices] did two things: They discouraged demand growth and encouraged a lot of conservation, which ultimately ended up reducing demand rather significantly. And they also encouraged the development of non-OPEC supplies. Both of these had some fairly detrimental impacts on OPEC exporters."

Meanwhile, Iran's reluctance to raise production may be based only in part on its distaste for succumbing to Western demands for cheaper oil. Iran is believed to be near or at its production limits. Beranek said Iran appears to be within 150,000 barrels a day of its absolute production limit, although he stressed that this is only an estimate.

Therefore if other oil-producing nations increase production significantly -- and if Iran cannot -- then Iran earns less for each barrel of oil it produces, and cannot make up for that shortfall with increased volume.