Why were the members of opec trying to agree to cut production in 1993?

Answer 1

VIENNA - Stung by what it called "a dramatic collapse" in crude oil prices, the OPEC cartel said Friday that it would reduce output by 1.5 million barrels a day, deeper than expected, and suggested that more production cuts were coming as the global economic slowdown undermined oil demand.

The announcement was made after an unusually brief emergency meeting of the Organization of Petroleum Exporting Countries here Friday. While the cut would be the deepest since 2003, it failed to provide the price cushion that OPEC members had been hoping for: Oil fell again, with December contracts dropping $4.02, or 5.9 percent, to $63.82 in New York by Friday afternoon.

OPEC is not scheduled to meet again until Dec. 17, but the cartel's president, the Algerian oil minister Chakib Khelil, said "there will definitely be another cut," then or possibly earlier, if crude prices keep falling. Since peaking at $147.27 in July, crude has fallen by 57 percent.

"The fundamentals are not good," Khelil said during an interview following the meeting. "This is a crisis situation."

Before the meeting, experts had predicted that the cartel would cut daily production by anywhere from one million to two million barrels. Venezuela and Iran were pushing for a decline of at least two million barrels, while Saudi Arabia contemplated a smaller reduction.

OPEC meetings in the past have been contentious, daylong affairs with fierce divisions between rivals like Saudi Arabia and Iran. But Khelil said this time, members quickly agreed on the 1.5 million reduction, which will take effect Nov. 1. "Everybody was on board," he said.

"They see the numbers," he added, referring to what he said was a sharp fall-off in demand from North America and Europe. Some exporters, he said, were having trouble finding buyers for their crude, while others found that normally reliable customers were unable to obtain letters of credit for their purchases because of the financial crisis.

Some members, led by Iran, had pushed for an aggressive cut in production. Their aim is to stop the precipitous slide in prices that risks putting a big dent in revenues and jeopardizes their large social spending programs.

Allies of the United States within the group, led by Saudi Arabia, had pledged to keep oil markets well supplied, as industrialized nations grappled with the worst economic crisis in decades. They have repeatedly said they do not want to add to the world's economic woes by pushing up oil prices.

"Oil prices have witnessed a dramatic collapse - unprecedented in speed and magnitude," OPEC said in its statement.

"This slowdown in oil demand is serving to exacerbate the situation in a market which has been oversupplied with crude for some time, an observation which the organization has been making since earlier this year," the statement read. "Moreover, forecasts indicate that the fall in demand will deepen, despite the approach of winter in the northern hemisphere."

When prices spiked this summer, the cartel blamed the jump on financial speculation. Saudi Arabia, the world's biggest oil producer and OPEC's most powerful member, ramped up production by 500,000 barrels a day.

The Saudis have since pared their output, which briefly reached a record of 10 million barrels a day, to around 9.5 million barrels a day because of lower demand.

Now, in the face of falling prices, Khelil said the group would be just as quick to react.

"We will do exactly the same thing we did this summer, except in the opposite direction," he said. The next cut could actually be more than 500,000 barrels a day, he added, if that's what's necessary "to stop prices from sliding."

Despite OPEC's ability to quickly agree to cuts and open the door for more reductions, the cartel is engaged in a perilous game. Falling commodity prices have been one of the only positive signs for consumer countries in a profoundly depressed economic landscape. Even China, long the main engine of oil demand growth, is showing signs that its economy has hit a speed bump.

"They are walking a very, very fine line," said Jan Stuart, an energy economist at UBS.

The last time oil prices fell below $50 a barrel was at the end of 2006, prompting the Saudis and other producers to engineer two deep cuts, totaling 1.7 million barrels a day. The strategy worked, and helped set the stage for summer's price run. The planned reduction of 1.5 million barrels is equivalent to 1.7 percent of current estimated worldwide demand in 2008.

The agreement was roundly denounced by consumer nations. A White House spokesman, Tony Fratto, called the move anti-competitive.

OPEC's secretary general, Abdalla Salem El-Badri, sought to portray the cut as an effort to avoid repeating what happened a decade ago, when prices plunged and new outlays for oil exploration slowed dramatically.

"If prices are too low, we will not be able to invest," he said. In particular, he said the group was concerned that inventories would build sharply in the first half of 2009 if cuts were not made now.

El-Badri did not cite a specific price target, a signal that producers were aware of the politically sensitive nature of their decision, especially with a protracted global recession looking more likely, and stock markets falling Friday. But privately, cartel members say they would be happy within a band of $80 to $90 a barrel.

In a rare appeal, OPEC called on nonmember producers to "contribute to efforts to restore prices to reasonable levels and eliminate harmful and unnecessary fluctuations."

At this point, there is no suggestion that outsiders, like Norway or Mexico, who have cooperated with OPEC in the past, would be ready to step in.

Earlier in the week, OPEC's secretary general visited Russia, the world's second biggest oil producer after Saudi Arabia. The country's deputy prime minister, Igor Sechin, who oversees Russia's energy sector, said the government was considering creating an oil production reserve that would allow it to have a bigger influence on the oil markets.

While inventories are rising, a growing number of analysts say they expect global oil consumption to fall this year for the first time since 1983. Oil consumption in developed countries has dropped for the past three years already, and there are signs now that energy demand growth from developing nations is also slowing down. Big question marks hang over what will happen to China. Demand in the United States, the world's biggest consumer of oil, has fallen to the lowest level in more than five years, at 18.6 million barrels a day, according to the Department of Energy. The department said Thursday that the world needed more oil, not less.

Western leaders have been increasingly vocal in recent days, urging OPEC not to cut its output. Prime Minister Gordon Brown of Britain said that any bid to push up prices would be "scandalous."

In the past, OPEC members have frequently ignored the quotas, however, and countries like Iran and Venezuela are desperate for revenue to avoid severe budget pressures at home.

Khelil insisted that this time would be different. "Unless they meet their commitments, they will be worse off than they are now," he said. "The market is going to test whether we are committed."