Even if oil output rises, gas prices adjust slowly

Under pressure from US, oil-rich nations agree they should pump more oil.

With oil prices soaring, the US is pressuring the world's leading producers to loosen their valves and increase availability for American buyers.

Energy Secretary Bill Richardson had some success this week in meetings with officials from five major oil nations, increasing the likelihood that oil will become more plentiful and prices will drop. But analysts say consumers shouldn't hold their breath for an easing of gas-pump prices.

Oil moves slowly from the Gulf region, and the Organization of Petroleum Exporting Countries (OPEC) would probably not increase output until April.

Yesterday, oil ministers from Saudi Arabia, Venezuela, and Mexico gave reassurances that they would recommend an increase in OPEC production, but details of how much will not be known until a March 27 meeting.

"There is need for additional production," said Saudi Oil Minister Ali Naimi. "The issue is when and how much."

Largely because of OPEC production restraints from a year ago, prices have hit their highest point since the Gulf War - about $30 per barrel for crude oil, or more than $1.50 per gallon at most US gas stations.

The situation was not helped by a cold winter and high heating-oil consumption in the Northeast. High prices could stunt the world's economic growth, officials warn, and, in the US, continue to be a campaign issue, especially if the trend extends into the summer travel season.

The cost of oil is perhaps the most glaring weakness of the American economy, and it has raised inflation worries. Some members of Congress are pressing the Clinton administration to punish countries that do not meet the US oil needs - possibly by curbing arms sales to the Middle East.

"The administration has fallen short in its efforts to persuade OPEC and non-OPEC nations alike to moderate their aggressive policies designed to punish oil-importing nations," said Rep. Benjamin Gilman (R) of New York, who chairs the House Committee on International Relations.

In addition to causing problems in the US, sustained high prices could have "serious repercussions for the world economy," Mr. Richardson said Tuesday.

It is not uncommon for oil prices to plunge after they have been particularly high, which could foster instability in nations such as Venezuela. Two years ago, oil was as cheap as $10 a barrel.

In Mexico, a non-OPEC oil exporter with presidential elections looming, Oil Minister Luiz Tellez favors lowering the price, but some politicians want to do just the opposite. Mr. Tellez is accused of being a puppet of the US.

For the US, oil diplomacy is a dicey business, likened by some to a game of chicken. With supplies low, there is a danger that US refineries could try to wait for better prices before replenishing their stocks. At the same time, OPEC could refuse to increase production. And, if there were a shortage, consumers could get hurt by both moves.

Already, world production trails consumption by about 2 million barrels per day, Richardson says. The only real leverage the US has is to open its oil reserves - 570 billion barrels - which could lower gas and heating-oil prices for a time.

One plan under discussion would allow oil companies to borrow from the government reserves, and then replenish the fuel when prices drop. Officials are hesitant to do so, however, because it would take them on a slippery slope of market intervention. Also, officials say the reserves are to be used to boost supplies, not to lower prices.

"We believe that the market should determine the level of oil supply and oil prices on the world market," Richardson said.

Instead of dipping into the reserves, the administration chose to send Richardson on a week-long oil-diplomacy tour, a tactic that also carries risks. By publicizing meetings with the oil minister from Saudi Arabia, for example, Richardson risks putting too much pressure on the world's top producer, says Guy Caruso, a former Mideast oil analyst at the Central Intelligence Agency who now works at the Center for Strategic and International Studies in Washington.

If the Saudis urge the rest of OPEC to raise production, "it puts them in a position where they look like the lackeys of the US," he says. Saudi Arabia, the driving force behind OPEC, is also awkwardly positioned between the US and Iran, an OPEC member with whom the Saudis are trying to improve relations. Iran wants to keep production low, which pushes prices up.

But oil producers also face long-term repercussions if prices remain too high, says George Beranek, an oil analyst at the Petroleum Finance Co., a consulting firm in Washington. Among other complications, they could lose their best client, the US. "Sustained high prices," he says, "do a lot to energize the development of non-OPEC oil sources."

(c) Copyright 2000. The Christian Science Publishing Society

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