With oil prices falling, O.P.E.C. weighs cuts

Ministers of the Organization of Petroleum Exporting Countries meet Tuesday in Vienna and may unofficially ease back on production levels that are above OPEC quotas.

On Tuesday, oil prices dipped below $100 a barrel for the first time since April as expectations grew that ministers from the Organization of Petroleum Exporting Countries (OPEC) would not officially cut production.

But ahead of Tuesday’s late-night OPEC gathering in Vienna, there was some speculation from energy analysts that producers would agree to modest cuts in output to slow falling prices. Member states Iran, Libya, and Venezuela argued that prices should be left higher.

Reuters reported from London Tuesday afternoon that prices of Brent Crude dropped to $99.56 a barrel. The price of light, sweet crude for October settled at $103.26 on the New York Mercantile Exchange, another five-month low.

“We will probably stay at the [present] level,” OPEC President Chakib Khelil told reporters before the meeting, according to the Associated Press.

However, industry sources also reported that an agreement had been made to trim over-production by 500,000 barrels per day (b.p.d.), without affecting current OPEC quotas that total nearly 30 million b.p.d. The production quotas have been exceeded in recent months – mostly by Saudi Arabia – to rein in surging prices.

Analysts say Saudi Arabia wants the price per barrel to stabilize near $80 or $85, while Iran – which relies heavily on price fluctuations to increase revenue – wants the price to stay above $100.

A summertime boost in production came amid serious talk of prices soaring to $175 per barrel, or even up to $250. Analysts say that while no formal cuts are likely to be agreed in Vienna, Saudi Arabia will quietly reduce its overproduction levels in coming months.

The recent production increase resulted from the US and other major consumers asking to keep prices in check after July's record high of $147.27 per barrel. Now, OPEC leaders are weighing a complex set of variables as they try to strike a balance between keeping their revenues high without hurting global demand.

The decision of the 13-nation cartel will affect the price of oil, which will in turn affect the price of gas at the pump.

"We have worked very hard since June's meeting to bring prices to where they are now. I think everything is in balance," said Ali al-Nuaimi, oil minister of Saudi Arabia, which produces nearly one third of OPEC output.

"There is a misperception out in the market that the Saudis cut production in August [but] we believe they stepped up production in August, to try to change the psychology of the market and move prices down a bit," says Larry Goldstein of the Energy Policy Research Foundation in Washington. "We believe they have achieved that objective."

Now, he says, "It's much easier for them to allow production to slip than to agree to a formal quota cut, which will be looked upon as an aggressive, hostile action by the West.... They have a lot of flexibility to slowly, quietly, invisibly let production slip."

OPEC is looking at the strategic implications of its decisions in context of a global economic downturn, the run-up to the US presidential election, and long-term stability that will ensure future market growth.

"Some of the bigger members like the Saudis are very concerned that inventories might build excessively, and that might suppress demand further down the road," says Mike Lynch, an Amherst, Mass.-based oil consultant and head of Strategic Energy and Economic Research.

The primary divide is between US-allied Saudi Arabia on one side, and Iran, Venezuela, and Libya on the other. All three have limited production, and anti-Western political agendas. But Venezuelan exports are down as domestic demand increases, and Iran's exports, too, are limited.

"We believe the market is oversupplied," said Gholam Hossein Nozari, the oil minister of Iran, OPEC's No. 2 producer. The chair of Libya's National Oil Corp. told the Associated Press on the eve of the OPEC meeting: "There is a glut in the market that warrants creating order."

"It's part business, part politics," says Mr. Lynch. "The Saudis will be saying maybe the price is too high, and market share is shrinking. And the Iranians and Venezuelans will have no trouble saying: 'Oh, no, we really need to stabilize prices at these levels, and besides you are just running-dog lackeys of the Great Satan.'"

Iran is the only oil exporting country that has witnessed serious economic problems despite unprecedented oil revenue. Inflation was reported this week to have officially hit 27 percent, and President Mahmoud Ahmadinejad has come under fierce criticism for rampant spending and economic mismanagement.

"Every $10 rise in the oil price is $7 billion of additional revenue in the Iranians' hand, which the US and the Saudis have to be a little bit nervous about," says Goldstein.

As the de facto leader of OPEC and the member with the most over-quota capacity, Saudi Arabia has "more leverage" than Iran or Venezuela, says Goldstein, and will use it to "make sure they have a stable, predictable, large-size market for an inordinate period of time."

And while US, European, and Asian consumers have grown accustomed to the high prices, there a many signs that they have taken steps to conserve, as if the price were not going to fall again.

"The reality is there is a psychological element, but there is also just the economic calculation which is, [even] at $80 per barrel, it makes sense to buy this slightly smaller car [or] to put in a more efficient burner," says Lynch. "So if it drops below $100, it's not like everyone is going to go out and buy a Hummer."