Opening the Tap
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RAY SUAREZ: Just in the last few hours, word came from Vienna that after long negotiations, OPEC (Organization of Petroleum Exporting Countries) was going to move forward and raise its production quotas without Iran.
The price hawks from Iran resisted pressure from other members of the oil cartel to agree to an alliance-wide increase, just as Iran fought against the cut in production last year. OPEC members, who pump just under a half of the world’s daily oil supply, will add about 1.5 million barrels per day to current production.
For more on today’s OPEC decision, we are joined by Phil Flynn, a senior market analyst at Alaron.com, a brokerage house; and Phillip Verleger, a partner at the Brattle Group, an economic consulting firm. Phillip Verleger, let’s start with you. A million-and-a-half barrels going to satisfy the world and especially the United States’ thirst for oil?
PHILLIP VERLEGER, The Brattle Group: No, sir. Very simple answer: Too little and too late. OPEC will increase production by, they say, a million-and-a-half barrels a day but after you allow for cheating, it’s 500,000 barrels a day. We probably need a million barrels a day just to keep prices stable in the next quarter.
RAY SUAREZ: Won’t the cheating on the quotas still go on giving you a net increase of a million-and-a-half barrels?
PHILLIP VERLEGER: If past is any prologue, no, you’ll probably get a little increase but not a great deal of increase. Then you gradually get more cheating towards, say, June or July.
RAY SUAREZ: Phil Flynn, what do you make of a promised increase of a million-and-a-half barrels?
PHIL FLYNN, Alaron.com: I think the most interesting thing about it is there is dissension in the ranks. One of the reasons why OPEC has been so successful over the past year raising the price of oil has been their unity. And now with this break with Iran, you know, on the front this obviously — this raise in production, they had to bring it in kicking and screaming. And on the record, Iran is against it, and they’re not going along with it. But there are other OPEC members who were just as much against it but are bowing to U.S. pressure and going along with it. So I think the big issue here is, are they just saying that they’re going along with it and not really raise production? Maybe we’ll see cheating in the opposite direction — as opposed to more barrels we may see less. That’s going to be the interesting thing to watch as we get a little further along.
RAY SUAREZ: Well, how could we possibly not know? I mean a million-and-a-half barrels is 45 million gallons of oil, I guess. I mean that’s a lot of oil. It’s either there or it’s not. When would we know?
PHIL FLYNN: Well, what we do to monitor, we have independent agencies that continually monitor. We have our weekly stocks reports in the United States that will start showing up in about six weeks. If this oil is here, we’re going to see also not only OPEC oil, we’re going to see Mexican oil, probably Norway oil and of course in other areas. So we’re going to see some more oil.
The question is will it get to the United States in time? And the other big question that we’re going to have to deal with is this 1.5 million going to be enough to satisfy the Clinton administration and the U.S. Congress? This is going to become a very, very hot political issue. The last couple of days, Bill Richardson went on a barn-storming tour. He may have hurt some feelings along the way.
One of the reasons why Iran is not going along is because they don’t want to appear that they’re bowing to U.S. pressure. Now, the big question is, is this going to be enough to appease the Clinton administration and how critical is the U.S. Congress going to be? The Congress, Trent Lott has gone on saying that he believes that we’re letting OPEC walk all over us. Essentially right now that’s what we’re going to have to deal with. What is going to be the U.S. response and that could be as important as how much oil that OPEC is going to pump.
RAY SUAREZ: Well, Phillip Verleger, this is the time of year when demand is supposed to be going down. Does that ease this any?
PHILLIP VERLEGER: Demand for the final consumer goes down a little bit this time of year. Demand for crude oil goes up normally as refineries build inventories. I think we ought to make a couple or correct a couple of things that were said. One, we really don’t have very good information on how much oil is moving. I participated with the Secretary of Energy in a debate over what were called missing barrels. About a year-and-a-half ago we lost track of a million-and-a-half barrels a day of production. The IEA criticized over it. So we’re really not going to know until June or July what’s going on.
And we need more oil. We need more oil now to build up inventories to avoid very high gasoline prices. As I said, it’s too late, we’re not going to get it. The other point that I think we need to think about is going forward to December whether there will be enough capacity within OPEC, if OPEC wants to use it, to keep prices below $35 a barrel.
You can make a case that we’re going to need all the production in the world, not just eliminating all of the quotas over the next six months in order to make it through keeping prices at $30-$35 barrels a day through December and into the springtime.
Now, the problem is in 1979 and 1980 when we hit a situation like this, several of the OPEC countries cut production. As Phil said, there could be some cheating in the other direction. This is a historical pattern of several of the OPEC countries enjoying some market power, cutting production to jack up prices. I think we’re going to see that in the coming months. So I think we’re just at the start of things regardless of what the administration does.
RAY SUAREZ: Well, one of the things that kept this announcement until so late in the day in Vienna where it’s about, you know, the middle of the night is that there was real disagreement in the negotiations — the Saudis trying to hit a target of $25-$27 a barrel; the Iranians saying, “No, let’s keep making money.” What are the two different motivations here? What are these two different countries looking at in order to take these very different positions?
PHILLIP VERLEGER: Well, one of the things, this is not the first time OPEC has gone several days. There was once a 23-day meeting. So this is short by historical standards. The Iranians clearly maximize their wealth from high oil prices, and they don’t really care about the situation in the U.S. economy. The Saudi Arabians have a much longer life reserve so they want to maintain an oil market for the next 100 years. They don’t want prices to be so high that essentially oil gets squeezed out as it did in the ’80s. And the Saudis also are cognizant of their role in the U.S. economy not just in terms of defense — as we hear commonly — but because the Saudis have between, oh, $500 billion and maybe $750 billion invested in the western economy. And they know that high oil prices could really bring down the infrastructure, bring down the stock markets and hurt them financially. The Iranians have nothing at stake.
RAY SUAREZ: Phil Flynn, the countries that are not part of OPEC and they pump a lot of oil, the Britians, the Norway, the Americas and the United States and Mexico, can they become big players in this as well, keep prices down on their own by opening up the taps?
PHIL FLYNN: Well, they’re not going to be able to pick up with OPEC pumps. And that’s the problem that you have here. I also want to, you know, discuss the political situation within OPEC a little bit more carefully. The bottom line is right now is that the smaller OPEC countries are in a desperate situation economically. When oil prices were down below $10 a barrel or not below $10 but near $10 barrel, their economies were really, really suffering. They’re very, very concerned that this raise in production is going to cause the same thing that happened back in 1998 and cause another oil glut and put them back into the same type of situation that they were in previously. So I think that’s the main thing that we have to, you know, concentrate on here.
Right now, I think the main thing that we have to see here out of OPEC, they’re walking in very, very fine political tight rope right now. The only reason that OPEC agreed to any raise in production is because of U.S. pressure. But if you had to ask any one of the Saudi oil ministers off the record if they feel that a large increase is justified, they’re going to probably answer you no. And the reason why they’re doing it is to bow to U.S. pressure.
PHILLIP VERLEGER: Could I –
RAY SUAREZ: Go ahead. Please.
PHILLIP VERLEGER: I actually think that if (Energy Secretary) Bill Richardson had stayed home, we probably would have gotten a larger increase. The Saudis have been and all the members of OPEC have been trying to focus prices at around $35 a barrel, $25 a barrel. And prices were up at $35 a barrel a few days ago and they were on their way towards $40. So that I think all the oil-producing countries, all the members of OPEC, Norway, Mexico, recognized that some production increase was needed to compensate for the growth and demand that has been stimulated by this tremendous economic recovery we’ve had on a worldwide basis. So I think we would have gotten a production increase and I think the meeting would have been much smoother and we probably would have gotten a slightly larger increase had the U.S. just been very quiet about this whole thing.
RAY SUAREZ: Well, given that you agree that not much is going to change on the supply side, what are Americans going to see at the pumps through Labor Day?
PHIL FLYNN: I would have to say that right now that the way it stands right now that prices are probably going to continue to go up. As Phil said, it’s too little too late. Even if we start pumping oil today, it’s going to take at least six weeks to get to the U.S. consumer. So there is going to be that lag period in there. We have seen gas prices just drop modestly last week but as soon as the summer driving season kicks into high gear, we’ll probably see prices start to edge higher again. Trent Lott might get his tax holiday at $2 a gallon. It may be coming. So let’s look forward to the holiday.
PHILLIP VERLEGER: I absolutely agree with Phil. We’re going to $2 gasoline. The big problem we really face now is that we have a constraint on our U.S. refineries. EPA is introducing a new type of gasoline for much of the country this year and refiners are going to have more difficulty making it. That’s going to put upward pressure on prices. Inventories are low and refineries tend to break at inopportune times as we see out here in California every spring and summer. So, you know, I think it’s going to be a very, very difficult season for vacationers. They’re going to be paying a great deal more for gasoline and we’re not near the top of the price.
RAY SUAREZ: Gentlemen, thank you both. We have to end it there.