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Oil output increase won't slash gas prices

March 28, 2000
Web posted at: 1:26 PM EST (1826 GMT)

By Tony Karon

(TIME.com) -- Don't expect relief from higher gas prices any time soon, even once OPEC agrees to raise output. The oil-producing cartel and its non-member allies continued to haggle Tuesday over just how much more crude they should be pumping in response to pressure from the United States for a 2.5 million-barrel-a-day increase.

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While countries that owe a favor or two to Washington for having been bailed out of trouble in the past -- Saudi Arabia, Kuwait and Mexico -- have persuaded most OPEC members to agree to a 1.7 million-barrel-a-day uptick, Libya is still holding out for a stingier increase.

"Washington is pushing for 2.5 million a day in the belief that it will bring quicker relief to U.S. consumers," says TIME senior business writer Bernard Baumohl. "Even an increase of 1.7 million won't bring U.S. energy prices down that much."

The fact that the United States is forced to call in political chits to bring down the oil price shows a remarkable turnaround for an oil cartel that was all but written off two years ago, when it flailed helplessly trying to stop members from cheating on output targets as the price languished at $10 a barrel.

"OPEC itself may have been surprised at the extent to which their members and associates have complied with production targets over the past year, because there had been so much cheating in the past," says Baumohl. "Non-OPEC producers would start to cheat to generate more revenue from oil, and then OPEC members would follow suit. But since last March, they've held firm, and they're likely to do that as long as it continues to maximize their revenues."

The key to OPEC's success is setting the right price. "OPEC has been clever in keeping its own target price around $25 a barrel," says Baumohl. "They know that if they drive the price into the $30-to-$35 range, there'll be an incentive for further oil exploration and to develop energy alternatives. But that incentive isn't there if they keep the price at the $25 level." And that's still 2.5 times the January 1999 price level, which means that even if the price at the pump falls, it won't be by much.

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