OPEC Weighs Cutbacks Vs Hurting World Economy

Substantial output cut could cause prices to spike and increase OPEC revenues, but it could also prolong economic woes in the U.S. and other major oil consumers.

VIENNA (AP) -- Slash oil output to boost revenues but risk deepening the world's economic woes? Rarely have OPEC oil ministers faced a tougher choice.

The Organization of the Petroleum Exporting Countries meets in Vienna Sunday, where they could reduce daily production by up to half a million barrels, or do nothing.

OPEC meetings are usually more clear cut. If oil ministers of the 12-nation organization think prices are too low, they decide to crimp output -- as they have at the last two meetings. If oil is too pricey, as was the case less than a year ago, they boost production. And if they are happy, they keep to the status quo.

But desperate times call for more finessed decisions.

This time, the ministers want to bolster prices. While prices are off their low of around $30 just a few weeks ago, a barrel of crude still fetches less than a third of what it did over the summer. That is well below the break-even point for producing nations, which could affect not only their national budgets, but oil production as well.

Cheap crude has been one of the few bright spots in a world economy reeling from the financial meltdown that has led to the deepest and most stubborn global recession in decades. While a substantial output cut could cause prices to spike and increase OPEC revenues, it could prolong economic woes in the U.S. and other major oil consumers.

And such a reduction could not only deepen the perception that OPEC is out for profits, whatever the global costs. It could ultimately backfire in real terms, by further depressing demand and driving down prices.

"They don't want to be seen as fueling recession further, which is what they're going to be seen as doing if the reduce production more," said London-based analyst John Hall.

But if OPEC can't bring in enough money to expand production, there is a danger of a price spike when the global economy recovers.

Two reports published Friday were expected to support traditional OPEC hard-liners such as Venezuela in their arguments that a further output cut is needed. At the same time, they served as an indirect warning -- drive up prices more and face even less demand in a sputtering global economy that already has cut back on consumption.

The International Energy Agency said world demand would drop for a second consecutive year for the first time since 1982-1983. In its closely watched monthly survey, the IEA cut its earlier forecast for demand this year by 270,000 barrels a day to 84.4 million barrels a day -- 1.5 percent lower than a year earlier.

"The eventual resumption of global demand growth will largely depend upon much stronger economic performance than is currently the case" among the world's biggest energy consumers, said the agency, adding that the latest indicators are "not encouraging."

An OPEC report, meanwhile, noted that demand for oil produced by the cartel -- which can supply more than a third of total world output -- was expected to fall this year to 29.1 million barrels. That would be a substantial decline of 1.8 million barrels a day compared to 2008.

Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, said OPEC is in a very bad spot.

"It would be unthinkable that anything can happen at this meeting that would lead to major sort of move in fuel prices, at least the kind of jolts we became accustomed to from 2005 to 2008," Kloza said. "This isn't the year for it. The world is broke and it's not using energy."

The OPEC meeting comes as the world takes at least a breather from the usual relentless slew of bad news since the financial crisis became most acute last October. The down Dow Jones industrial average is up around 10 percent and most Asian and European markets also are climbing.

However, governments and investors are wary of calling the end to the downturn. A failure by the G-20 finance ministers and central bankers to provide a united front at this weekend's meeting in southern England could be one catalyst for a renewed bout of pessimism and market turmoil.

Perceptions of how OPEC acts could affect global equity markets.

Some OPEC ministers are calling for cuts, nonetheless. "If we do not reduce, prices will fall," Algerian Energy and Mining Minister Chakib Khelil said Wednesday, saying OPEC viewed $75 a barrel as a fair price both for consumers and producers.

But continued concern about the world economy -- and apparent pressure within OPEC from oil powerhouse Saudi Arabia to eliminate overproduction by individual members such as Iran and Venezuela -- suggest the ministers might opt for a small, symbolic cutback; or perhaps none at all.

OPEC cuts agreed on since September were meant to take a daily 4.2 million barrels off the market. But there is general agreement that the 10 members of the group under production quotas are still overshooting their joint target level of just under 25 million barrels by about 800,000 barrels a day.

A relatively strong comeback in prices may help the Saudis and other Gulf producers make their case. Prices have rallied from below $35 a barrel last month, with a barrel of benchmark crude fetching close to $47 a barrel on the New York Mercantile Exchange Friday.

"They're likely to keep the production target at the present level," said Ehsan Ul Haq, chief analyst at Vienna's JBC Energy. To compensate for overproduction by others, "Saudi Arabia has gone below its production target, and they expect 100 compliance from others" before considering cutbacks, he added.

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