OPEC agrees to boost daily output by 500,000 barrels

George Jahn

Associated Press Writer

Seeking to cool volatile markets, OPEC ministers on March 16 agreed to pump an extra half million barrels of oil a day beginning April 1 and held out prospects of another production boost later if needed.

The move appeared in line with a proposal by OPEC’s president, Kuwaiti Oil Minister Sheik Ahmed Fahd Al Ahmed Al Sabah. He suggested March 15 that OPEC agree to a rise in output of 500,000 barrels a day and follow it some time in the future, if necessary, with another hike of the same amount.

The decision was confirmed by Libyan oil minister Fathi bin Shatwan.

Edmund Dakouru, Nigeria’s presidential adviser on oil matters, said the ministers of the Organization of Petroleum Exporting Countries will meet again June 7.

The decision to boost output will officially raise the group’s ceiling to 27.5 million barrels a day, tying an output record.

But with Iraq — which is exempt from quotas as it rebuilds — and quota-busting factored in, OPEC is already producing close to 29.5 million barrels a day.

With OPEC feeling the need to build worldwide stocks ahead of next winter, its decision showed it was apparently ready to accept temporary oversupply — and dropping prices — to be able to deal with any anticipated winter crunch.

“The industry is very scared of the second half” of the year, when demand is expected to grow, said an official at the meeting.

Dakouru, the Nigerian oil official, said “the extra oil will go a long way” toward meeting any concerns about winter supply.

At a time of stubbornly high prices, decisions to raise OPEC output are meant to tell markets that supply is available to meet demand. It is a message that has previously cooled buying frenzies.

Still, beyond sending a psychological signal of the group’s readiness to respond to high prices, a formal increase of 500,000 barrels daily would only reflect the realities — OPEC members bound by the quota already produce about 700,000 barrels a day above the group’s official ceiling.

But an increase now raises questions about next time. Most forecasts predict even greater world demand in the future.

Estimates vary but most surveys put OPEC’s spare capacity between 1 million to 1.5 million a day. Most of it is Saudi oil, which needs more refining than the preferred “sweet” crude produced by some other OPEC members. Oil production by states outside OPEC is stagnating.

With western economies generally expanding, demand soon could outstrip supply. The economic boom in China is already sucking up more than a third of the world’s crude supplies. India’s hunger for oil is also on the rise. At some point — no one has come up with a firm figure — the market would price oil so high that economies would begin to contract and demand would fall.

“We have to face facts. The International Energy Agency has raised demand estimates to 84.3 million barrels per day and that exactly equals worldwide daily consumption,” said analyst Phil Flynn in a newsletter March 15. “We’re at total equilibrium.”

“OPEC has reached its production limits,” Algerian Oil Minister Chakib Khelil said before the meeting. “If it came to a crunch, it has capacity for 1 million barrels.”

The Energy Information Administration, the statistics arm of the U.S. Department of Energy, said March 15 that OPEC’s spare capacity fell to 1 million to 1.5 million barrels a day in February, not enough to cover a loss of Iraqi output.

The EIA and the International Energy Agency, which monitors oil market conditions for the Organization of Economic Cooperation and Development, both raised their forecasts for 2005 oil demand last week, drawing the picture of a market in which consumption will continue to strain supply.

After weeks of prices above $50, Washington is calling on producers to take steps to lower the price. The White House complained March 15 that rising energy costs were a drag on the U.S. economy.

White House press secretary Scott McClellan said the administration was telling oil producers “about the importance of acting in ways that support our growing global economy and our growing U.S. economy.”

Experts said the effects of a ceiling increase would be minimal.