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OPEC: Ministers Leave Output Cutbacks In Place

Prague, 15 March 2002 (RFE/RL) -- OPEC oil ministers have agreed in principle to keep output restrictions in place until at least June.

Iranian Oil Minister Bijan Namdar Zangeneh was quoted today as saying the cartel would maintain joint production at the current rate of 21.7 million barrels a day. He was speaking at an OPEC oil ministers' meeting in Vienna.

The decision was expected to win formal approval later in the day.

OPEC members have reduced their combined output by around 20 percent in a series of phased cutbacks at the end of last year and early this year. It was hoped the reductions would stabilize world prices, which plummeted after the 11 September terror attacks and a global economic slowdown.

OPEC ministers meet regularly at their Viennese headquarters to consider output levels. The cartel's members, mostly the Gulf oil states and Venezuela, account for about one-third of world output.

The decision to maintain output at current levels was expected, but analysts say OPEC must be careful not to allow prices to rise too high, too quickly.

To be sure, OPEC members do benefit initially from higher oil prices. But higher prices cut into demand, and in the longer term, they encourage consumers to develop and use alternative fuels. Sustained high oil prices can trigger recession in consumer countries, sending demand tumbling for months and sometimes years.

Oil prices are now on the rise, bolstered by prospects for world economic recovery and concern over possible U.S. military action in Iraq. Benchmark prices touched near $25 a barrel yesterday, their highest since 11 September.

OPEC has set a price target of $22 to $28 a barrel as representing an optimum that maximizes producers' profits without cutting into demand. Ministers today said that with the price near the middle of that range, they saw no reason to change output levels.

Iraq is a major oil producer in its own right, but experts say any U.S. military action against the country could also upset oil flows from other regional producers like Kuwait and Saudi Arabia. The effect on output and prices could be severe.

Prices rose earlier this week on comments by U.S. President George W. Bush indicating that military action against Iraq -- as part of the overall war on terror -- could be imminent. That pressure has now eased somewhat, but traders say the market remains jittery.

Experts say another factor that OPEC must weigh is the pace of the global economic recovery. The U.S. and Western Europe have been mired in recession for months, but there are growing signs that a recovery could come soon.

Analysts say a rapid recovery could prompt a sudden increase in demand and pull oil prices sharply higher.

Any gap in the supply and demand could be made up by non-OPEC producers like Russia. But, so far at least, Russia -- the world's third-biggest oil producer -- has agreed to reduce its own output in accord with OPEC.

Russian Deputy Oil Minister Oleg Gordeev, also in Vienna today, said Russia would be "technically prepared" to extend the voluntary cuts until the end of the second quarter. He said a formal decision would be made next week.

It's not clear, however, how long Russia would agree to the voluntary cutbacks in the face of sharply rising world demand.

OPEC members themselves could choose to undercut the restrictions by cheating. Indeed, there's ample evidence that cheating is well underway. In February, OPEC members produced an average about 25 million barrels a day -- well above the agreed quota of 21.7 million barrels.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.