OPEC Orders Cut in Oil Production

[ikaotiki]

VIENNA — Stung by what it called “a dramatic collapse” in crude prices, the OPEC cartel said Friday that it would reduce output by a steeper-than-expected 1.5 million barrels a day. But that action failed to brake the decline, with oil dropping another 5 percent by the end of the day.

The oil cartel swiftly agreed to the cut in an emergency meeting at its headquarters here, and its president suggested afterward that still more production cuts are coming as OPEC struggles to get ahead of an economic slowdown so severe it could leave the world awash in oil.

The stunning decline of oil prices in recent weeks has left oil-exporting countries fearful that they will have to cut government budgets, including the popular social programs that cement many leaders’ hold on power.

Oil has dropped from a high close of $145.29 on July 3 to $64.15 a barrel on Friday, a 56 percent decline in 16 weeks that marks one of the steepest in the history of the oil markets.

If prices keep falling, OPEC’s president, Chakib Khelil, said the cartel will “definitely” reduce its production again in coming months, either when it meets again in Algeria in December, or sooner.

“The fundamentals are not good,” Mr. Khelil, who is also Algeria’s oil minister, said in an interview after the meeting. “This is a crisis situation.”

In a rare appeal that highlights the urgency of the situation for producers, the cartel is also starting to look beyond its ranks for help in stabilizing the market. OPEC called on other oil-producing countries to “contribute to efforts to restore prices to reasonable levels and eliminate harmful and unnecessary fluctuations.” OPEC’s members control 40 percent of the world’s oil exports.

Members of the Organization of the Petroleum Exporting Countries face their toughest test in years. The slowing global economy has depressed the consumption of oil in the United States, Europe and Japan, and the global economic turmoil risks spreading to emerging economies such as China, long the main engine of oil-demand growth. OPEC members said they had little choice but to reduce production to avert a glut.

“OPEC has been slow to grasp the full impact of the financial crisis on the real economy, and it dawned on them all of a sudden,” said Vera de Ladoucette, a Paris-based energy analyst at Cambridge Energy Research Associates, of Cambridge, Mass. “There is definitely a new sense of urgency.”

Despite OPEC’s ability to forge a rapid consensus on Friday, members of the cartel know they are navigating perilous seas. For consumers, falling commodity prices have been one of the only positive developments in a profoundly depressed economic landscape. If OPEC’s cut eventually sends oil prices higher, that would be another blow to the global economy.

The cutback was roundly criticized by the White House, which called it “anti-competitive,” and by the British prime minister, Gordon Brown.

“They are walking a very, very fine line,” said Jan Stuart, an energy economist at UBS in New York.

Many analysts expect global oil consumption to fall this year for the first time since 1983. Oil consumption in developed countries has dropped for the last three years, and there are signs that the growth in energy demand from developing nations is beginning to slow.

OPEC’s action comes just as domestic gasoline prices, for the first time this year, are lower than they were last year. They now average $2.78 a gallon, down from their peak of $4.11 on July 17. In some states with low taxes, gasoline has dropped below $2.50 a gallon.

Despite the lower prices, gasoline consumption is still down. Retail sales fell 6.4 percent last week compared to the same week a year earlier, according to a national survey by MasterCard Advisors.

OPEC meetings have often been contentious, daylong affairs with fierce divisions between rivals like Saudi Arabia and Iran. Before Friday’s session, experts had predicted the cartel would cut 1 million barrels a day. Venezuela and Iran were pushing for a bigger daily reduction of 2 million barrels while Saudi Arabia contemplated a smaller cut.

But Mr. Khelil said this time, members agreed on the 1.5-million-barrel reduction with little argument. That cut, to take effect Nov. 1, amounts to about 5 percent of OPEC’s output and nearly 2 percent of global oil consumption.

Mr. Khelil said exporters are having trouble locating buyers for their crude, with some countries finding that normally reliable customers cannot obtain letters of credit to fund their purchases because of the financial crisis.

Even the Saudis, who had argued for keeping markets well supplied at the last OPEC meeting, seem to have been struck by the speed of the price drop.

“This slowdown in oil demand is serving to exacerbate the situation in a market which has been oversupplied with crude for some time,” OPEC said in its statement. “Moreover, forecasts indicate that the fall in demand will deepen.”

The drop in prices is affecting both exporters and importers in unexpected ways. With fewer petrodollars now flowing to the Gulf, Russia and other regions, a major source of global liquidity and investment in places like the United States and Europe is beginning to shrink.

When prices spiked this summer, the cartel’s leaders attributed the jump to speculation, and Saudi Arabia, the world’s biggest oil producer and OPEC’s most powerful member, opened the taps and ramped up production to a record of 10 million barrels a day. The Saudis have since pared their output to around 9.5 million barrels a day, according to analysts.

As the lowest-cost producer, Saudi Arabia can afford to let prices fall for a while without hurting its budget. Most analysts estimate the Saudis could live with oil between $55 and $65 a barrel. But other producers need higher prices. Nigeria’s oil minister said his country would be more comfortable with $80, Qatar has set a range of $70 to $90, and Iran’s representative said that prices below $90 a barrel would hurt.

In fact, for Iran and Venezuela the drop in prices is particularly painful, since both have been spending freely on the assumption that prices would stay high. A continued drop in oil prices, and a tough domestic economy, could jeopardize the position of Iran’s president, Mahmoud Ahmadinejad, who was elected on a populist platform and who faces re-election next year.

Venezuela’s leftist president, Hugo Chávez, has forced out several foreign oil companies, and the state-owned oil company is struggling to keep production from falling. Some analysts believe Mr. Chávez needs $100 a barrel to fund his expensive social programs and continue his international activism.

“Venezuela doesn’t have many options if prices fall,” said William H. Brown III, an independent oil analyst who has consulted in the past for Saudi Arabia’s national oil company, Saudi Aramco. “That’s why they’re so desperate to keep prices up.”

OPEC’s secretary general, Abdalla Salem El-Badri, sought to portray the cut as an effort to avoid repeating what happened a decade ago, when prices plunged and investments in oil exploration slowed dramatically. This echoes the view of some petroleum executives, who have warned that declining prices would lead to lower spending and delays in new projects.

“If prices are too high, it will damage the market,” Mr. El-Badri said. “If prices are too low, we will not be able to invest.” In particular, he said the group is concerned that inventories will build sharply in the first half of 2009 if cuts are not made now.

Mr. El-Badri did not cite a specific price target, a signal that producers are aware of the political sensitivity of their decision, especially with a protracted global recession looking more likely, and stock markets nosediving on Friday. But privately, cartel members say they would be happy within a band of $80 to $90 a barrel.

So far, no sign has emerged that independent producers like Norway and Mexico, which have cooperated with OPEC in the past when prices collapsed, are ready to step in with production cuts.

But earlier in the week, Mr. El-Badri visited Russia, the world’s second-biggest oil producer after Saudi Arabia, to discuss ways of cooperating. The country’s deputy prime minister, Igor Sechin, who oversees Russia’s energy sector, said the government wanted to have a bigger influence on oil markets.

In the past, OPEC’s members have frequently ignored the group’s own quotas. But Mr. Khelil, OPEC’s president, insisted this time will be different.

“Unless they meet their commitments, they will be worse off than they are now,” he said of OPEC members. “The market is going to test whether we are committed.”