Oil producers had agreed to modest increases in the supply when prices rose way about $30 a barrel last fall, but a substantial fall in prices in December is prompting moves to once again restrict the supply. Leading OPEC members such as Saudi Arabia have set a target price range of between $22 and $28 a barrel — a figure Washington can live with despite Energy Secretary Richardson's lobbying against a cut, because it represents minimal inflationary pressure.
But two factors are muddying OPEC's best efforts to manipulate the oil price by controlling the supply. The first is the slowdown in the U.S. economy, which has been the engine of global economic growth over the past two years. That growth, particularly in Asia's export-driven economies, has substantially increased international demand for oil, driving last year's spiraling prices. A sharp slowdown in the world economies could plunge oil prices back into the teens, and make it more difficult for OPEC to maintain the remarkable cohesion and output discipline among its members exhibited in the past two years. A short slowdown represents a different set of perils, if it's followed by an uptick in growth that could drive the price back up to the levels that prompted panicky responses from the West last Fall.
What will Iraq do?
The wild card, as usual, remains Iraq, which hopes to use its substantial share of the world's oil market to manipulate prices for political effect. Iraq last December briefly turned off the taps in a dispute with the United Nations over the sanctions regime that puts control of Iraqi oil revenues in the hands of the international body. Although Baghdad quickly resumed its supply, it is now pumping only 600,000 barrels a day, 1.7 million barrels short of the quota set by the U.N. program that allows Iraq to sell oil in order to buy food. Saudi Arabia's Sheikh Ahmed Zaki Yamani, whose leadership made OPEC a world power during the '70s, warned Thursday that the cartel may yet be blindsided by Iraq, as Saddam Hussein prepares for a new round in his battle to end sanctions. He warned that the planned 1.5 million-barrel cut proposed for next week could send prices soaring if Iraq failed to resume production at full quota — because the impact of Iraq's cutback has not yet been felt on the world market. Yamani warned that a sharp spike would work in Iraq's favor, since it would compel oil companies to pay a 40-cents-a-barrel surcharge imposed by Baghdad in violation of the sanctions regime.
Some of OPEC's more economically strapped member countries, such as Iran and Venezuela, may be more inclined to press for higher prices, but Yamani fears such short-term thinking may be disastrous for the cartel by prompting new exploration and creating economic effects that once again shrink demand. But Sheik Yamani is no longer in charge of Saudi oil policy, and indications are that the cuts will go ahead. Which will leave all eyes on the global economic numbers — and Saddam Hussein's next move.
With reporting by Bernard Baumohl/New York