September 6, 2000. Copyright 2000. Graphic News. All rights reserved.

BACK OVER THE BARREL AGAIN

LONDON, September 6, Graphic News: WITH OIL PRICES at new levels OPEC oil ministers gather in Vienna on Sunday to debate an increased output of at least 500,000 barrels a day (bpd).

A year and a half of short supply, orchestrated by the Organization of the Petroleum Exporting Countries and non-OPEC producers such as Mexico, has pushed exemplar North Sea Brent crude to $33 a barrel Ð its highest since the 1990 Gulf War Ð and over three times its $10-nadir of some eighteen months ago.

The crisis made President Clinton appeal to Saudi Arabian leaders, to encourage them to increase oil production and to fly to West Africa for a head-to-head with NigeriaÕs President Olusegun Obasanjo. Nigeria exports around two million bpd of the high grade ÒsweetÓ oil which is in demand for U.S. compliance with new Ògreen gasolineÓ regulations.

The hiked-up price is the result of pressure by an Òinternal cartelÓ of Gulf nations which has emerged within OPEC. Iran, with fellow hawks Libya and Algeria, has held to the strategy of pumping less oil to force up the price and VenezuelaÕs capacity has been reduced sharply under President Hugo Chavez. Saudi Arabia is under pressure internally from hard-liners who see high oil prices as a way to reduce government debt.

Throughout 1999 the cartel cut production, working in concert to lift prices from record lows of below $10. The final cut in March 1999 was the largest and sent prices on their upward spiral.

With Brent trading well past the $30 level which the U.S. condemns as excessive, refinery inventories in the U.S. and Europe have dwindled to 8 percent below last yearÕs levels.

However, OPEC blames the West for high prices, saying it has increased production but canÕt sell the oil, blaming high European fuel taxes and greedy market speculators. In Europe up to 80 percent of the cost of a litre is tax. British motorists pay $190 a barrel at the pump for gasoline that fetches $40 a barrel at the refinery gate.

In August OPEC, led by Saudi Arabia which favours prices no higher than $25 a barrel, did increase output -- by 670,000 bpd to 29.04 million bpd -- to a level not seen for nearly 20 years, but still failed to contain runaway crude prices.

Patterns of trade show that the extra oil is going east to Japan and Singapore rather than west to where the shortage is acute.

This may be because Saudi Light oil requires refining and U.S. refineries are currently running at full steam to produce new cleaner-burning gasoline, which is more difficult to make than conventional gasoline. U.S. refineries are also scheduled for a maintenance break in October.

With a fuel price revolt in France and official complaints from the United States, the European Union and Japan, economists are fretting again that rocketing fuel costs could spark a fourth Òoil shockÓ which, like those of 1973, 1979 and the 1990, could lead to recession.

However, the world finds itself far better prepared to manage another OPEC crisis. Determined not to be caught out again, the West invested heavily in its own oil. The multinationals developed new production technologies that enable most crude reserves to be accessible at $12 a barrel, and pumped oil from regions like the North Sea. Power generators in nations without oil turned to nuclear energy and then increasingly to cleaner fuels like natural gas.

Saudi ArabiaÕs Sheikh Ahmed Zaki Yamani is in little doubt -- the return to $30-a-barrel crude has only hastened the day when OPEC will be left staring at untouched fuel reserves, marking the end of the oil-boom era. 

ÒIncreasing the price of oil in the 1970s was a serious mistake. OPEC used to have 70 percent of the worldÕs production and it fell to 30 percent. The same mistakes are being made.Ó

Most people in the industry agree that, while prices will stay higher at least for the next six months, it is likely to be another case for OPEC of short-term gain, long-term pain.
/ENDS
Sources: Reuters, Associated Press, BP Statistical review of world energy