Download OPEC Says It Will Cut Oil Output

OPEC Says It Will Cut Oil Output
By NELSON D. SCHWARTZ and JAD MOUAWAD
New York Times
October 25, 2008
Chakib Khelil, center, the president of OPEC, said on Friday that some regular customers
could not obtain financing to buy oil. - Vladimir Weiss/Bloomberg News
VIENNA — Stung by what it called “a dramatic collapse” in crude prices, the OPEC
cartel said on Friday that it would reduce output by a steeper-than-expected 1.5 million
barrels a day. But that action failed to brake the price decline, and oil dropped 5 percent
more 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 were coming as
OPEC struggled 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 dropped to $64.15 a barrel on Friday, from a high close of $145.29 on July 3, a 56
percent decline in 16 weeks and one of the steepest in the oil markets.
If prices keep falling, OPEC’s president, Chakib Khelil, said the cartel would “definitely”
reduce its production again in coming months, either when it meets 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 like China, long the main engine of growth in oil demand. 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, an energy analyst based
in Paris 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.
“They are walking a very, very fine line,” said Jan Stuart, an energy economist at UBS in
New York.
The cut was criticized by the White House, which called it “anticompetitive,” and by the
British prime minister, Gordon Brown.
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 with 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 the session on Friday, experts predicted
the cartel would cut 1 million barrels a day. Venezuela and Iran were pushing for a bigger
daily reduction, of 2 million barrels.
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 consumption.
Mr. Khelil said exporters were having trouble locating buyers for their crude, with some
countries finding that normally reliable customers could not obtain letters of credit to
finance their purchases because of the financial crisis.
“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 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.
Even the Saudis, who argued for keeping the markets well supplied at the last OPEC
meeting, seemed to have been struck by the speed of the price drop.
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 increased 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 that the Saudis could live with oil at $55 to $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.
For Iran and Venezuela, the drop in prices is particularly painful, because 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 reelection 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 finance 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 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 significantly. 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. Badri said. “If prices are too low,
we will not be able to invest.” In particular, he said the group was concerned that
inventories would build sharply in the first half of 2009 if cuts were not made now.
Mr. Badri did not cite a specific price target, a signal that producers were aware that their
decision was politically delicate, especially with a protracted global recession looking
more likely, and stock markets nose-diving 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 when prices have collapsed, are ready to step in with
production cuts.
But this week, Mr. Badri visited Russia, the world’s second-biggest oil producer, to
discuss ways of cooperating. A deputy prime minister for Russia, Igor I. Sechin, who
oversees the country’s energy sector, said the government wanted a bigger influence on
oil markets.
OPEC’s members have frequently ignored the group’s quotas. But Mr. Khelil, OPEC’s
president, said this time would be different.
“Unless they meet their commitments, they will be worse off than they are now,” he said.
“The market is going to test whether we are committed.”
Nelson D. Schwartz reported from Vienna and Jad Mouawad from New York. Alan
Cowell contributed reporting from Paris.