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| OPENING THE TAP | |
March 28, 2000 |
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The oil cartel OPEC has agreed to raise oil production by as much as 1.7
million barrels a day. The increase was met with opposition from member
delegate Iran. Ray Suarez leads a discussion on what the increase means
to the United States.
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| A "true" million-and-a-half barrel increase | ||||||||||||||||||||
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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: 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. |
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| OPEC's motivation and interest | ||||||||||||||||||||
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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: 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. |
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| The cost to the U.S. consumer | ||||||||||||||||||||
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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?
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. |
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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. 
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. 
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? 
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. 
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. 
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: 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. 
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.
