OPEC Wants You to Pay More for Gas

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Bill Pugliano / Getty

Gas is $2.79 at a BP station in Royal Oak, Michigan.

For many consumers, the only silver lining on the global financial crisis has been the falling oil price it has precipitated. But OPEC is determined to put an end to the relief at the gas pump. Concerned to protect their countries' financial health, oil ministers from the 13 members of the cartel of oil-producing countries meet in Vienna on Friday with only one item on their agenda — cutting their oil output in order to drive up world prices. Oil prices have been slashed by more than half in just three months, from $147 a barrel in July to as low as $67.50 a barrel on Wednesday. That has prompted current OPEC president, Algerian Oil Minister Chakib Kjelil, to propose that the group cut up to 2 million barrels from its daily 32-million barrel output, hoping to push the price back up to about $90 a barrel. The effect would be to raise prices in the U.S. and Europe, just when Western leaders are scrambling to soften the landing of their slowing economies. OPEC's proposal, fumed British Prime Minister Gordon Brown last Friday, "is absolutely scandalous."

Never much loved outside of its member states, OPEC is a convenient whipping boy for leaders responding to consumer pain, but oil analysts say it may not deserve all the blame. Its members have certainly earned mammoth windfalls from rocketing oil prices over the past year, but some face the prospect of domestic political upheaval if oil prices fall too low.

The recent windfall has, for example, given Iran — OPEC's second-biggest oil producer — a cushion to neutralize the impact of Western sanctions over its nuclear program, and to ameliorate the effect of a struggling economy. But because Iran imports crucial refined diesel to keep its cars and factories running, it needs to sell its crude oil for $60 a barrel or more, according to oil analysts. So, President Mahmoud Ahmadinejad has plenty of incentive to push his OPEC colleagues to vote for production cuts: If falling prices force his government to cut its heavy gasoline subsidies, he won't help his chances of reelection in a tough presidential race next June. "There is a lot of popular unrest when they cut subsidies or put on gas quotas," says Robert Johnston, Director of Energy for the Eurasia Group in Washington. For similar reasons, Venezuela President Hugo Chavez wants OPEC to cut production by about 1 million barrels a day, warning that his country would face dire economic problems if oil prices continue falling.

The needs of gas-guzzling Western nations, however, are exactly the opposite. Ironically, though, a falling world oil price negates the goal stated by Barack Obama and John McCain to cut America's dependence on foreign oil, especially from the volatile Middle East. That's because although it only accounts for about one-fifth of U.S. imports, oil from Saudi Arabia, Kuwait and other Middle Eastern countries is much cheaper to produce than the more politically popular alternative of oil drilled in Canada or the United States.

Even more than the lower prices, OPEC leaders have been jolted by the lightning speed with which they have tumbled. But their influence over prices is more limited than many in Western countries believe, or OPEC members would like: OPEC members, in fact, produces only one-third of the world's oil; the rest comes from Canada, Russia, Mexico, and several smaller countries. The cartel sets production quotas for each member, but those are routinely violated by bigger players, like Saudi Arabia, whose well usually have spare capacity. "We saw that when prices went up to $145 a barrel OPEC was helpless," says Fadhil Chalabi, executive director of the Center for Global Energy Studies in London, who was an OPEC official during the last global oil crisis of the 1970s. Nor did they anticipate the sharp fall in demand which has helped send the price of their oil plunging. "This is not like the 1970s," says Chalabi. "OPEC has become a price-taker, not a price-maker." Still, if taking a couple of million barrels a day off the market has its desired effect, OPEC will once again be cast among the villains of the current economic downturn.

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