OPEC says it will cut output by 2 million barrels

GEORGE JAHN

Associated Press

December 17, 2008 at 6:00 AM EST

ORAN, ALGERIA — Saudi Arabia, OPEC's de-facto leader, said Wednesday the group will slash a record 2 million barrels from its daily production, while Russia and other countries said they would join in the effort by removing hundreds of thousands more barrels from the market.

Saudi Oil Minister Ali Naimi said there was an OPEC consensus ahead of a formal agreement later in the day for the cut.

An official decision to cut 2 million barrels from output all at once would be a first for the organization. OPEC had cut that amount from its output four years ago, but that was done in two stages.

Also significant would be formal support from Russia, Azerbaijan and other non-OPEC producers. Mexico, Norway and Russia slashed production in the late 1990s, at a time oil was selling for about $10 (U.S.) a barrel.
Saudi Oil Minister Ali Naimi speaks to reporters at the OPEC meeting in Oran, Algeria. Ouahab Hebbat/AP
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Saudi Oil Minister Ali Naimi speaks to reporters at the OPEC meeting in Oran, Algeria. (Ouahab Hebbat/AP)
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Russian Deputy Premier Igor Sechin and Azeri Energy Minister Natik Aliev said separately their countries would reduce output by a total of more than 600,000 barrels a day.

Mr. Naimi first mentioned the 2 million figure in Oran on Tuesday, the eve of the oil ministers' decision making meeting. Asked Wednesday if he stood by that figure, he told reporters “that's the correct number.” Later, he said the cut would take effect Jan. 1, pending formal approval by the ministers.

Mr. Sechin, in comments to The Associated Press, said “Russian oil companies have already made a decision to cut deliveries to the market ... approximately equivalent to 350,000 barrels per day.”

“As soon as OPEC makes the decision, Russian companies will immediately follow,” he said.

Mr. Aliev said his country, too “will support the OPEC cuts,” slashing up to 300,000 barrels a day from Azerbaijan's output. That would be more than a third of total production for the country on the oil-rich Caspian Sea.

Mr. Aliev said his government had calculated the 2009 budget based on an oil price of $70 a barrel, and would have to compensate for the loss of money by tapping into a strategic government oil fund. Oil prices have plunged stunningly in recent months to less than $50 a barrel from $147 a barrel in July.

That might be good for consumers already straining from the financial crisis. But — like Azerbaijan — OPEC and non-OPEC producers are hurting from levels that are in some cases now below what's needed to balance their budgets or earn a profit.

Oil producers fear a drawn-out lull in prices could hurt investment and lay the groundwork for another sharp price spike when the world's economy rebounds.

“There's always been some finger-pointing at OPEC, but now even some (rich consuming nations) are saying maybe prices have gone too far,” Olivier Jakob of energy analysis firm Petromatrix in Switzerland said ahead of the meeting. “In terms of security of supply, you are much worse at $40 a barrel than at $75.”

OPEC gave ministers ammunition to justify cuts in its latest monthly market report, released Tuesday. The bloc predicted demand for its crude oil will have fallen by 700,000 barrels per day this year, and will drop by at least twice that amount in 2009 as the worsening global economy “is expected to have a strong impact on oil demand.”

Ahead of a formal decision, other OPEC ministers also expressed sentiment for a large cut to shock the market and put a floor under prices.

Shokri Ghanem, Libya's delegate to OPEC, said that “we should make a substantial cut” and that 2 million barrels was “a very good number.”

Venezuelan Energy Minister Rafael Ramirez used similar language: “What is important is that there should be a consensus to cut production. A significant cut,” he said. Mr. Ramirez added that Venezuela, a traditional price hawk, favors a cut of between 1 million to 2 million barrels per day.

Iranian Petroleum Minister Gholamhossein Nozari did not give a number, but said that Iran would support a reduction of 2 million barrels per day.

Still, while eager to push prices higher, OPEC must weigh production cuts against the risk of driving the economies of its top customers deeper into recession.

A senior OPEC official, who spoke on condition of anonymity because he was not authorized to comment publicly, said “reasonable” OPEC nations would accept prices around $50 a barrel in the short term so as not to contribute to the world economic downturn.