Iran, Venezuela Push for Higher Oil Prices

Sept. 10, 2008— -- Just when American motorists were starting to get a little relief at the pump, OPEC -- the cartel of oil-producing nations -- decided to cut back production, a move that could stop oil's recent fall.

In the past two months, the price of oil has fallen nearly 30 percent from its July 3 high of $145 a barrel. As this week started, it looked as if oil could fall below the psychological barrier of $100 for the first time since beginning of March.

OPEC oil ministers agreed early this morning in Vienna, Austria, to cut output by more than 500,000 barrels a day.

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The move was a compromise between countries looking to keep oil prices high and others looking to give a struggling world economy some relief.

On one side are Iran and Venezuela, which want to squeeze as much money as possible out of the United States and other large oil consumers. On the other side of the fight is Saudi Arabia, with strong political ties to the United States and President Bush's family.

In the coming days, expect Washington politicians to lash out against Venezuela and Iran for trying to reduce to flow of oil.

"You don't get on the US's good side for calling for oil production cutbacks but Venezuela and Iran were scarcely on America's good side to begin with," said Jerry Paylor, a senior fellow at the Cato Institute, a Washington thinktank. "You'll probably see plenty of wailing and gnashing of teeth over this because it's in everyone's interest to find easy scapegoats and there's no easier scapegoat in American politics than OPEC."

However, Paylor warns that there is absolutely no correlation between OPEC declarations about production cutbacks and actual OPEC behavior. In fact, most nations are producing as much oil as they can.

"There's a lot of evidence out there that OPEC is completely fraudulent. The only thing that real matters is the unilateral exercise of Saudi market power," he said.

And the Saudi's could simply choose to ignore the cartel's decision.

"For all the rhetoric from Iran and Venezuela about cutting back oil, you don't actually see the two countries reducing their output," Paylor said. "What you essentially have is Venezuela and Iran telling Saudi Arabia to quit producing so much."

White House Press Secretary Dana Perino in a briefing this morning said President Bush disagrees with OPEC's decision.

"We would like to see more oil on the market, not less," she said, adding that the president is calling on Congress to vote on additional drilling in the U.S.

Asked if the president plans to make any personal efforts to convince OPEC leaders to change their decision, she said: "Remember, it's not just the United States, but many other countries who have asked OPEC to make sure that those oil markets are well supplied."

"What President Bush is going to be focused on in the next three weeks is working with Congress in a bipartisan way, to the extent that we possibly can, to try to get a bill that would allow for more expanded production here in our own country," she added.

Oil analyst Stephen Schork, who was in Vienna to monitor the meeting, said Iran and Venezuela don't care about the economic impact of high oil prices.

"The world is having a tough time paying its bills, so let's raise the price," he said. "Typical Venezuela. Their talk is cuckoo for Cocoa Puffs."

OPEC Tries to Stay Relevant

Schork believes that speculators had a major role in the run-up in oil prices and can also profit from a quick fall in prices.

"If we can go from $75 to $150 in a few months time, there is nothing to stop it going down -- or lower -- just as fast," he said.

He says OPEC's move this morning was a warning to speculators not to liquidate their holdings.

Phil Flynn, senior energy trader at Alaron Trading Group, said OPEC made a big mistake.

"They're going to be seen as piling on to a world economy that's in turmoil right now. This production cut is going to politically backfire on them," Flynn said. "If this global economic slowdown becomes more prolonged, OPEC is going to get their share of the blame and they should. They're withholding supply from a market that still has oil prices above $100 a barrel."

Cost of Rising Gas Prices

The move is the wrong decision at a time when Flynn said "the world is trying to wean themselves off their product."

"I think they are very short-sighted," he added. "If they looked at the big picture, they should be encouraging lower prices right now because lower prices would slow down the move to alternative fuels and would help the world economy rebound faster, suiting them better in the long-run."

Flynn says OPEC wants to send a message to the market that it still controls the flow of oil.

"They are trying to say: Hey, we still matter," Flynn said. "I think they are panicking right now because demand is falling and they're afraid that prices will collapse."

More Pain at the Pump

For Americans, the price at the pump has fallen from an average of $4.11 on July 7 -- an all-time high -- to $3.65 this week. That's an 11 percent drop in nine weeks; but gas prices are still 83 cents a gallon higher than they were a year ago. OPEC's decision could stop the recent fall of gas price in just a week or two.

The 13-member oil cartel sets limits every few months on how much oil each member nation can produce. In June, Saudi Arabia decided to go 500,000 barrels a day above its quota to help keep oil prices in check.

The move came after President Bush flew to the Middle East in May to lobby the royal family in the hope of giving Americans some relief from high gas prices. At first, Bush was rebuffed in his request, but a few weeks later King Abdullah met Bush's demand for more oil and even went one step further, increasing output more than Bush had originally sought.

Today's move by OPEC essentially forces the Saudis to remove that extra oil from world markets and go back to their November 2007 production levels.

The move is part political and part economic.

Giant OPEC Profits

OPEC nations have seen enormous profits from the record oil prices. Now as the price of crude has plunged the countries want to protect that windfall.

"I think it's true to say that Venezuela and Iran did not want to see the price of oil fall below $100," said John Hall, managing director of John Hall Associates Ltd.

Hall was also in Vienna for the meeting and said that this move will hurt Saudi Arabia and the world economy.

"It's the oil price increase that hits world economic growth more than anything else," Hall said.

Oil prices were little changed in response to the OPEC decision, puzzling analysts including Hall. Oil was actually trading down about a dollar mid-day today.

"We thought the price would go up but it has barely moved," Hall said.