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Several Factors Behind OPEC Output Cut, say Analysts - 2003-09-24

The Organization of Petroleum Exporting Countries, known as OPEC, has decided to cut crude oil production to stabilize prices. Some officials from OPEC member nations cited Iraq's return to oil production as a reason for the move. But, industry analysts see Iraq as only one factor motivating the OPEC action.

At the OPEC meeting in Vienna Wednesday representatives of the ten member nations decided to reduce output by 900,000 barrels a day starting November 1. Reaction to the move was immediate in markets around the world. Light crude futures in the United States jumped by over a dollar a barrel and stock market averages tumbled.

Some participants in the OPEC meeting backed the output cut by citing a recovery of the oil industry in Iraq where output is expected to double by March. But oil industry analysts say that is only one of many developments that could put pressure on oil prices. Michelle Foss, Executive Director of the Institute for Energy, Law and Enterprise at the University of Houston says increasing output from non-OPEC nations is also a problem for OPEC.

"There is additional production coming from Russia and additional production in West Africa and other locations," she said. "The cartel has been, in recent years, very successful in maintaining oil prices within or above the price band that they have set. So this is, I think, a normal reaction on their part to contain any collateral damage that might be coming in from the global marketplace."

The increase in oil prices comes at a time when the world economy is struggling to recover from a deep downturn. Michelle Foss says the action in Vienna could have a negative impact on economic recovery if oil prices go up and stay up.

"We have a number of sectors that are energy sensitive, transportation, of course, being the biggest one, but there are also other industries that use crude oil for a variety of different things, whether it is chemicals or as a fuel for various industrial processes," she said. "It clearly is a risk for economic recovery. It depends, however, on whether OPEC can make this stick."

Ms. Foss notes that there are a number of factors that could undermine the OPEC production limits and bring prices down. OPEC members have been known to cheat in the past and some non-OPEC nations may want to take advantage of higher prices by increasing production.

More production cuts could come when OPEC ministers meet again on December 4 to set policy for the first quarter of 2004.