OPEC digs in against rivals, oil prices in flux

| Friday, November 16, 2001

Creating the prospect of a price war, OPEC said at a meeting Thursday in Vienna, Austria, that it would not blink first in a showdown with rival producers over oil output curbs. With the announcement, the price for a barrel of oil slumped about $1.75 to $17 per barrel - well below the group's $22 to $28 target range.

The Organization of Petroleum Exporting Countries had been widely expected to announce a reduction in output to bolster sagging oil prices. But, officials announced the group would not cut production of 1.5 million barrels by the first of the year unless non-OPEC nations, including Russia, Norway and Mexico, agreed to trim output by a total of 500,000 barrels per day (bpd). A move that, at this time, seems unlikely.

Until this week's announcement, the cartel had opted to support prices, lowering output limits three times this year by a total of 3.5 million bpd. But demand, sapped by slowing economic growth, has seen world inventories pushed into surplus. In the meantime, non-OPEC exporters have continued to increase production. The increased output from competitors and OPEC's decreases in production led to a steady erosion of the group's market share, a situation that OPEC vows it will no longer tolerate.

Officials at OPEC are gambling that the excess oil on the market will lead to lower prices and cause the revenues of non-member nations to fall to unacceptable levels. The competitors might then agree to the group's demands. The risk is that outside producers, namely Russia, will remain unbowed and the economies of OPEC countries will suffer worse damage in a price war.

Signs emerged immediately following OPEC's announcement that opinion was changing among some independent producers. Mexico announced that it would cut oil exports by up to 100,000 bpd and Norway said it might be willing to trim output. But Russia, the world's second biggest exporter, has only offered to cut 30,000 bpd, leaving the cartel well shy of its 500,000 bpd goal for the three nations.

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