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OPEC Likely to Boost Oil Production; Impact on Gasoline, Crude Prices Probably Won't Be Significant

Posted on: Monday, 19 September 2005, 18:00 CDT

DUBAI, United Arab Emirates -- Faced with increasing international pressure to dampen oil prices, OPEC ministers gathering in Vienna this weekend will attempt to convince consumers they are doing all they can to keep the market well-supplied and prices stable.

With prices about 50 percent higher than a year ago and motorists feeling the increase at the gas pump, the ministers have repeatedly said that OPEC is concerned, but that factors beyond their control are to blame -- something analysts agree with.

At the meeting Monday, the Organization of Petroleum Exporting Countries is widely expected to increase the production ceiling by 500,000 barrels a day, although analysts said the impact will be minimal.

Previous OPEC moves have done little to ease market fears over supply.

"I think the degree of influence that OPEC can have on the markets at this meeting is rather limited. There's actually a need for more refining capacity, rather than crude," said Valerie Marcel, an oil analyst at the Royal Institute for International Affairs.

Production outages caused by Hurricane Katrina, continued instability in Iraq and the upcoming winter season have put pressure on prices, with crude reaching over $70 a barrel in the aftermath of the storm.

Katrina slammed into the U.S. Gulf Coast, a major oil production hub, at a time when producers worldwide were already struggling to cope.

The storm was blamed for the evacuation of more than 700 offshore platforms and rigs. Several Gulf Coast refineries in Katrina's path have shut down or reduced operations, taking out 8 percent to 10 percent of the nation's production capacity, according to company and federal reports.

Saudis set to step in

Muhammad-Ali Zainy, an energy analyst at the London-based Center for Global Energy Studies, said a production increase by OPEC will have a dampening effect on prices, "because it will partially offset the loss caused by Hurricane Katrina, and shows the consumers that OPEC cares about stabilizing the market," but the increase will not be significant.

"Since the increase will likely come from Saudi Arabia, the additional barrels will be heavy oil, and that's probably not very much welcome by refineries, given that the conversion capacity is very constrained," Zainy said. "The market is not hungry for crude oil, it is hungry for oil products."

Record high gasoline prices led OPEC to cut its 2005 world oil- demand forecast by 150,000 barrels a day. In -Britain, drivers lined up at retail stations after threats of fuel price protests caused worry about gasoline shortages.

On Tuesday, Britain's Treasury chief Gordon Brown called on OPEC to boost oil production and proposed coordinated international action to stabilize oil markets.

"The first action we must take is to tackle the cause of the problem, ensuring concerted global action is taken to bring down world oil prices and stabilize the market for the long term," Brown said.

"From the additional $300 billion a year in revenue OPEC countries are now enjoying and the additional $800 billion available to oil producers, there must be additional new investment in production and global investment in refining capacity," he added.

OPEC Acting Secretary General Adnan Shihab-Eldin countered that "part of the problem for consumers, and for the U.K. in particular, is the high level of tax."

Source: Columbian

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