[OIL PRICES] Organization of the Petroleum Exporting Countries faces production dilemma

The decline in oil prices in recent weeks has been a welcome relief for consumers and a rare piece of positive news in an otherwise bleak economic landscape. But for oil producers, increasingly accustomed to rising revenues, falling prices are fast turning into a cause for concern - if not quite panic.

Oil prices have fallen by a third in the past seven weeks and are headed for a drop below the symbolic $100 threshold for the first time since March. Though not a full-blown collapse, the speed of the decline is prompting some soul-searching within the Organization of the Petroleum Exporting Countries oil cartel.

Venezuela and Iran, the leading price hawks within the group, said they did not want oil to fall below $100 a barrel, a price Iran's oil minister recently said was a "minimum" level. Both countries signaled that members of the Organization of the Petroleum Exporting Countries needed to reduce their output to prevent prices from dropping further.

Other OPEC members, like Algeria or Kuwait, fear that high energy costs could jeopardize their exports as the global economy slows down and consumers reduce their consumption. Saudi Arabia, the world's top oil exporter, has not said what would be a fair price, although King Abdullah has said that $100 was too high.

For OPEC's dignitaries, meeting in Vienna next week, managing the current slowdown is tricky. Cutting production to stem the price drop could spark a backlash and paint the oil cartel as greedy and short-sighted. Leaving production unchanged may precipitate the decline in prices at a time when oil demand is slowing. "The biggest signal for OPEC is price," said Michael Wittner, the global head of oil research in London for Société Générale. "They are playing a balancing game: if prices are too high, they will kill the golden goose and hurt consumption. But at the same time, they see the weakening economy and are thinking the world doesn't need so much oil right now."

The price for oil for October delivery was down $1.57 at $107.78 a barrel in New York trading Thursday afternoon, the lowest level in five months. The drop accelerated even after Hurricane Gustav's passage over the Gulf of Mexico interrupted oil and natural gas production. Three other tropical storms are forming over the Atlantic Ocean and could yet thwart the slide in prices.

Still, prices remain historically high. Despite their fall from the record of $147.27 a barrel on July 11, oil prices are up 12.5 percent this year. They have more than quadrupled in five years.

Producers have become used to these high prices, which have powered an unprecedented economic boom in the Middle East, Russia and South America. From the gleaming towers of Abu Dhabi to the new cities burgeoning in Saudi Arabia, producers are relying on the income to develop new industries, attract new businesses and expand their economies.

This year should be no exception. OPEC's export revenue should exceed $1 trillion, according to estimates from the U.S. Department of Energy. The exporters have earned $642 billion during the first seven months of 2008, nearly as much as they did last year.

But the cartel is facing a dilemma. Demand for oil in the United States, the world's biggest market, has fallen by about one million barrels a day as a result of high prices, slowing economic growth and credit woes. The economic slump is spreading to Europe, and could also affect Asia, the main driver of oil demand growth. Also, the third quarter of the year is traditionally the time when refineries need less oil as they shut down for their annual maintenance.

At a recent meeting of producers and consumers in Jidda, Saudi Arabia pledged to keep pumping full out to bring prices down. The kingdom is OPEC's biggest producer and the group's de facto leader. At the same time, analysts said, the Saudis realize that if they keep their output at the current level, they will create a glut in the market. The kingdom is pumping about 600,000 barrels a day more than its official quota.

Some analysts believe the group may opt for an informal cut in production, reducing output without much fanfare, instead of a formal announcement that could prove to be too politically sensitive for some of the cartel's pro-Western allies, especially with the U.S. election season in full swing.

Another option may be to convene another meeting in six to eight weeks and announce a big reduction then. The group is already scheduled to meet in December in Algeria, but that could be too late for Organization of the Petroleum Exporting Countries to act if prices keep declining through the autumn.

Source: International Herald Tribune| By Jad Mouawad

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