Friday, June 4, 2004

Gas to stay high, despite OPEC help

Cartel to pump more, but U.S. refineries real issue

The Cincinnati Enquirer and wire services

OPEC agreed Thursday to raise its oil production ceiling by 2 million barrels a day next month and an additional 500,000 barrels a day in August if necessary in a bid to rein in uncomfortably high prices for crude.

Oil prices fell for the second straight day from $40-plus-a-barrel peaks reached earlier this week.

The production increase - the biggest in six years - takes effect July 1. But the increase in output, which was brokered by Saudi Arabia, the world's largest producer, was not as much as had been hoped.

And even if oil prices recede a bit from current levels, any retreat is not likely to be reflected in a drop in the price of a U.S. gallon of gasoline.

"Gasoline has its own issues right now in the United States," said energy strategist Katherine Spector at J.P. Morgan. "Gasoline prices have to do with refining, infrastructural and logistical constraints."

For example, it takes six weeks to two months for oil to be pumped from the ground, shipped, refined and make its way to a gasoline pump in Greater Cincinnati. Thursday, the average price of regular unleaded in Cincinnati was $1.93; and in Northern Kentucky, $2.

As recently as Wednesday, the Organization of Petroleum Exporting Countries ministers meeting in Beirut, Lebanon, signaled that the cartel intends to approve an immediate production increase of 2.5 million barrels a day.

Saudi Arabia is concerned that high oil prices will slow world economic growth, a development that would eventually stunt global demand for oil. Currently, the world is consuming 80 million barrels of oil a day.

Although OPEC is the world's single largest exporter of oil, many other countries, including Russia, Canada, the United Kingdom, Norway and the United States, all produce significant amounts of oil.

Crude oil prices fell about 6 percent Wednesday as Saudi Arabia said it had backing for its proposed production increase, and they slipped again Thursday. Contracts of U.S. light crude for July delivery fell 68 cents to settle at $39.28 a barrel in New York. In London, July contracts of Brent crude dropped 46 cents to settle at $36.40 a barrel.

There is some concern that the production increase announced Thursday might not be sufficient to satisfy current demand, since OPEC members are already producing above their quotas. That means the increase agreed upon Thursday will inject less new production into the market than advertised.

May 24, in Amsterdam, Netherlands, OPEC members reiterated the group's official position that production levels were not the main factor in the rise of retail fuel prices. Rather, OPEC noted that American refineries are already operating at full capacity and unable to process any more oil, while demand is booming in China and India and other developing economies.

PetroLogistics Ltd., an energy consulting group, estimated that during May, production from OPEC's 10 members probably averaged 26.35 million barrels, exceeding the cartel's limit by 2.85 million barrels.

Some analysts said concern about increased supply was misplaced.

"The basic story is this," said Philip K. Verleger Jr., a fellow at the Institute for International Economics in Washington. "Crude oil prices are high because gasoline prices, particularly in the United States, are high. And gasoline prices are high because the industry in the United States is making as much gasoline as it can make.

"This is a gasoline bubble. When it bursts, crude oil prices could go to $20 a barrel."

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