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OPEC Keeping Oil Price Down by Increasing Its Production



Pretty much what we have been talking about in class --CH
http://www.nytimes.com/2002/11/15/business/worldbusiness/15OIL.html
Title: OPEC Keeping Oil Price Down by Increasing Its Production
The New York Times The New York Times Business November 15, 2002  

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OPEC Keeping Oil Price Down by Increasing Its Production

By NEELA BANERJEE

The Organization of the Petroleum Exporting Countries, led by Saudi Arabia, has sharply increased oil production over the last month to damp high oil prices, which threaten the weak economic recovery and could spike if the United States attacks Iraq, industry and Middle East experts said yesterday.

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OPEC, which accounts for about one-third of the world's oil supply, has reduced exports several times this year, at least on paper, to 21.7 million barrels a day. Oil prices have fallen recently, but for most of the year have remained fairly high, averaging about $25 a barrel. OPEC members have been cashing in by producing far above their official quotas.

A recent survey of OPEC and oil industry officials by Platts, an industry newsletter, indicated that OPEC's 10 voting members produced 24.48 million barrels a day in October, an increase of 520,000 barrels a day from September. Iraq, which belongs to OPEC but whose production quotas are set under United Nations sanctions, also increased its output, by about 500,000 barrels a day. All told, more than one million additional barrels a day of oil flowed into global markets at a time when demand was still fairly anemic.

The price of crude oil for December delivery closed at $25.29 a barrel on the New York Mercantile Exchange yesterday, up 10 cents from the day before. Over the last month, the price of oil for December delivery has declined $4.68 a barrel, or 15.6 percent.

The most obvious explanation for OPEC's barely veiled cheating is that the market has been able to absorb it, keeping prices high. "They were making quite a bit of money without weakening the price until recently," said Leonidas P. Drollas, chief economist for the Center for Global Energy Studies, a London consulting and research firm. "They have been overproducing all year, and they just got greedier."

Many oil traders expect prices to fall even more in the near future because they think the rampant overproduction at OPEC signals the end of the cohesion that permitted the group to manage oil markets over the last three years and keep prices between $20 and $30 a barrel, said George Beranek, manager of market analysis for the Petroleum Finance Company, a Washington consulting firm.

But Mr. Beranek and other industry analysts said they thought that OPEC's overproduction was, in fact, an example of fairly effective, hands-on market management. The evidence, the analysts said, is that the members have maintained their percentage of output, as established by the official quotas, even as they overproduced, indicating that the increase was coordinated rather than ad hoc.

Most countries are producing about 10 percent more than their quotas, industry experts said. Saudi Arabia, the world's largest oil producer, has increased its output the greatest in absolute terms, by more than 800,000 barrels a day above its quota of 7.053 million barrels. The move may be consistent with the Saudi tradition of keeping oil markets well supplied whenever conflict has loomed in the Middle East, said Edward L. Morse, executive adviser at the Hess Energy Trading Company.

OPEC recognized that inventories of oil in many consuming countries, particularly the United States, were ebbing toward the low end of normal. Then a string of hurricanes in the Gulf of Mexico in late September and early October shut production at oil wells there, taking 630,000 barrels a day out of the market for about a month. Add to this fears that a war in Iraq would touch off disruptions in the supply of oil from the Middle East, and oil prices rose in mid-September to about $30 a barrel, a level most of OPEC considered uncomfortably high, industry experts said.

"Given the economic situation and that we're probably heading toward a conflict in the Middle East, OPEC wanted to get the base price of oil down so it wouldn't spike so high if war broke out," said one European oil analyst who spoke on the condition of anonymity.






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