OPEC set to pump more oil
 
Sep 19, 2005 - International Herald Tribune
Author(s): Jad Mouawad

OPEC's representatives said Sunday that they were prepared to increase their oil-production ceiling while warning that higher fuel costs were the result of shortfalls at refineries and thus beyond their control. Still, as they prepared to meet here for the first time since Hurricane Katrina roiled energy markets three weeks ago, oil ministers from Saudi Arabia and Kuwait indicated that they favored an increase of 500,000 barrels a day in the cartel's official production quota. That option, which might be raised to as much as one million barrels a day, comes in response to pressure from consuming countries that are increasingly concerned about the impact of high prices on their economies.

But it is unlikely that lifting the the Organization of Petroleum Exporting Countries' quota will bring much new supplies to the market. For the group, as for most oil analysts, the bottleneck in energy supplies comes from the inability of refiners to process enough oil to meet demand, not from a shortage of crude oil. Even if OPEC increased its production, it is unlikely to find many buyers.

 

The refining crunch was worsened after Hurricane Katrina disabled four major refineries along the Gulf of Mexico which together account for 5 percent of U.S. refining capacity putting them out of commission for months.

 

"The constraints are not on the supply side," Ali al-Naimi, the Saudi oil minister, said Saturday in Vienna. "The constraints are downstream. Katrina damaged some infrastructure, and that's why people aren't taking crude."

 

OPEC's ceiling is currently set at 28 million barrels a day, excluding output from Iraq. According to its most recent statistics, the group is actually producing closer to 28.2 million barrels a day. So the oil ministers are left to perform a delicate balancing act as they start their two-day meeting on Monday, providing some reassurance that they are serious about keeping markets well supplied while realizing they cannot do much to rein in prices.

 

The difficulties of refiners was apparent last week when the U.S. Department of Energy said it had sold only 11 million barrels from strategic petroleum reserves, only a third of the 30 million barrels it had initially pledged.

 

"I feel the market is well supplied," said Hammouda el-Aswad, the OPEC governor for Libya. "I don't see why OPEC should be responding to pressure when there is no need for more oil on the markets."

 

Some officials, including representatives from the United Arab Emirates and Qatar, said that an increase in the production ceiling might not be necessary because demand was weakening. After the hurricane punched through America's main energy hub, disrupting production, crippling refiners and pushing prices above $70 a barrel, little was heard from OPEC, whose 11 members pump more than a third of the world's crude oil. Instead, consuming nations had to dip into their own reserves to make up for the production shortfall from the Gulf of Mexico. To put a lid on prices, the Bush administration took the rare step of tapping into U.S.

strategic stocks. The International Energy Agency, which usually provides advice to 26 industrialized countries, used its emergency oil plan for only the second time in its 29-year history. Then OPEC said it was ready to "fill any supply shortfall," while Saudi Arabia said it would open the taps. But OPEC has little more to give. Since 2003, it has cranked up output by 10 percent, or 2.6 million barrels a day, to make up for a 5 percent jump in global oil demand. That increase leaves only one member with any spare capacity: Saudi Arabia, which is pumping about 9.5 million barrels a day. It is estimated to have another 1.5 million barrels a day of extra capacity but that crude is unpopular with buyers because it is consists of a viscous and sulfur-rich variety that refiners have trouble processing.

 

 

European leaders have been particularly vocal in recent weeks about the impact of high prices. The European commissioner for energy, Andris Piebalgs, took the unusual step of meeting with Sheik Ahmad Fahad al-Ahmad al-Sabah, the oil minister from Kuwait who is currently president of OPEC, on Sunday in Vienna to share his concerns. "OPEC has to respond to a political message with a political signal of its own," said Vera de Ladoucette, an energy analyst with Cambridge Energy Research Associates. "They are not irrelevant. But under the present circumstances, they seem a little powerless."

 

 


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