Production cuts boost oil prices to post-Gulf War high

February 14, 2000
Web posted at: 11:19 p.m. EST (0419 GMT)

In this story: Balancing profit with market pressure Prices could become a political issue RELATED STORIES, SITES

NEW YORK (CNN) -- Oil prices hit their highest level since the 1991 Persian Gulf War as observers blamed production cuts by oil exporters and panic buying for a yearlong spike in the per-barrel cost of crude.

Oil futures closed at $30.25 a barrel on the New York Mercantile Exchange on Monday, up 81 cents a barrel. In the past year, the price of crude oil has nearly tripled from $13 a barrel to $30.

Production cuts by oil-producing countries have prompted most of the increase, said industry analyst and Pulitzer Prize-winning author Daniel Yergin. But producers have been more successful than they intended when they moved to cut production last year.

The average price of gasoline in the United States reached a record $1.36 per gallon last week, the Energy Department said Monday. That's the highest cost for motor fuel on record since the department began tracking weekly gasoline prices in 1990, after Iraq's invasion of Kuwait.

"If they don't ease more oil into the market over the next six weeks, we could see prices spike a good deal higher than they are now," Yergin said.

The three chief architects of producer production curbs have been Saudi Arabia and Venezuela, both OPEC heavyweights, and Mexico, a non-OPEC producer. Those countries are to meet early in March to draw up a strategy on oil policy amid pressures to raise production, and OPEC oil ministers will meet in the Austrian capital Vienna to decide on future policy at the end of the month.

If the current price increases continue into the second quarter of 2000, OPEC countries risk sparking inflation and cooling the economies they need as markets, Yergin said. Those countries would like to see prices settle into the $24 to $26 range.

"They think that's the highest range they can make money at without encouraging a lot of new non-OPEC development," he said. "Also, they have to worry about slowing our economy, cutting into our demand and kind of getting themselves into the problems they were in a couple of years ago."

In Asia, where many economies depend heavily on imported oil, a sharp rise in energy costs could endanger the region's fragile recovery from a prolonged economic slump. And Iraq last week threatened to cut back the small amount of oil it is allowed to sell on world markets, further contributing to inflationary fears.

As a result, the leading OPEC nations are likely to boost production toward the end of March, Yergin said.

But the issue is becoming a political one as well. Last week, the International Energy Agency warned that oil inventories were drained sharply at the end of last year and were being depleted faster now because of producers' supply curbs.

U.S. Energy Secretary Bill Richardson urged producers to boost supplies last week, and he will travel to the Middle East and Mexico in late February to make the case in person.

While concerned about rising energy prices, the Clinton administration says it has no plans to release crude oil from the Strategic Petroleum Reserve.

It's also an election year in the United States, Yergin noted.

"This is actually a hot issue on Capitol Hill, and over the next several weeks, we'll see a lot of jawboning in Washington and in some of the other industrial countries," he said.

Reuters contributed to this report.

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