Khelil says OPEC has agreed to 1.5 � 2 million b/d cut

The 11 member states of the Organization of Petroleum Exporting Countries have endorsed a production cut of up to 2 million b/d, OPEC Pres. Chakib Khelil said Tuesday. In an interview with the OPEC news agency, Khelil said OPEC ministers reached a tentative agreement following 2 weeks of talks.


The 11 member states of the Organization of Petroleum Exporting Countries have endorsed a production cut of up to 2 million b/d, OPEC Pres. Chakib Khelil announced Tuesday.

In an interview with the OPEC news agency, Khelil said OPEC ministers reached a tentative agreement following 2 weeks of talks.

Meanwhile, the Center for Global Energy Studies warned Monday that the world economy would be threatened if OPEC decides to cut production 1.3-1.5 million b/d. OPEC is due to meet in Vienna Wednesday.

Khelil, Algeria's Energy and Mines minister, said he "hoped that this consensus will be maintained at (tomorrow's) meeting," adding that he was discussing a means to a "quick, definite decision" on the exact production cut to made.

He said US Energy Sec. Bill Richardson's proposal, made in Paris last weekend, for a two-stage cut totaling 1 million b/d "did not take in account the real level of oil stocks (worldwide)."

Khelil stressed that the oil price stability being sought by OPEC would be provided by an output reduction of between 1.5-2 million bbl. He added that it would "probably be necessary" for OPEC to "put back on the market what it had taken off" later this year.

CGES warned economic growth rates are "falling fast" and "fears of a recession in the US are very real.

"OPEC has been lulled into a false sense of well-being after a year in which Brent (crude) averaged $28.4/bbl and oil demand showed no sign of weakening in response," CGES said. "OPEC appears to believe that the world economy can live happily with $30 oil. It is wrong.

"To avoid a serious slowdown in economic growth, the world needs oil prices below $20/bbl," it cautioned, "but OPEC appears determined to keep them at $25/bbl. Eventually something will have to give."

A production cut of 1.5 million b/d�which CGES said would be closer to 1.3 million b/d because some OPEC members already are lowering output�also would question the credibility of the organization's price band mechanism, which was designed to be triggered when prices drift outside $22-28/bbl.

CGES also was concerned about how a massive production cut, beginning next month, would affect stock cover. "Even with a relatively low demand growth (this year), the world will enter the winter of 2001-02 with stock cover of just 1 day higher than at the start of this winter," it said.

Last weekend Richardson and European Commission Energy and Transport Commissioner Loyola de Palacio urged OPEC to avoid "precipitous action."

After meeting with Richardson in Paris on Friday, de Palacio said, "Because the market is still volatile, producing nations should be extremely careful about cutting production and should consult with the countries that will feel the greatest impact.

"Precipitous action to severely decrease world production levels at a time when inventories are building will increase volatility and raise prices, hurting both producer and consumer countries and the developing world," she said.

CGES said OPEC was "clearly shocked" by the sharp decline in oil prices at the end of last year, but that the organization's "decisive action" did not consider how much of the fall in prices was due to temporary factors�such as precautionary stock-building by Asian refiners and Atlantic basin heating oil consumers, and the release of oil from the US Strategic Petroleum Reserve�and "how much was due to more fundamental forces, such as the rapid slowdown in the US economy."

A recent Morgan Stanley Dean Witter & Co. report predicts global growth will slow from 5%/year to 2.9% in 2001. In the US, the analyst said the outlook is bleaker still with real GDP growth dropping to 1.1% and a recession coming in the first half.

These predictions, CGES notes, might be "even worse if oil prices do not fall," since Morgan Stanley Dean Witter assumed the price of Brent could fall to $18/bbl by the second quarter.

CGES said it expects global oil demand to climb by "1.3 million b/d at most" this year as economic growth rates are destabilized, a figure that could be "even lower" if OPEC's pursuit of high oil prices impedes economic recovery.

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