OPEC to Cut Production

V I E N N A, Jan. 17, 2001 -- OPEC oil ministers agreed to a deal to cut oil production by 1.5 million bpd (barrels per day).

Some hawks in the 11-nation Organization of Petroleum Exporting countries, which controls around a fifth of world supplies, had been advocating a bigger cut still.

But after a series of bilateral meetings Tuesday in luxury hotel suites across Vienna, hawks like Qatar and Iran — who wanted a 2 million bpd reduction — were ready to accept a lower figure.

"The cut is not going to have a negative impact on consumers," said Leo Drollas, chief of the London-based Centre for Global Energy Strategies. "It's not too bad. It could have been worse."

The United States and the European Union had urged producersto make only a modest reduction.

After the deal U.S. light crude eased 54 cents a barrel to$29.75. London Brent blend lost 51 cents to $25.00.

"This agreement will keep oil prices stable and not harmproducers or consumers," said Libya's OPEC representative AhmedAbdulkarim.

Aim to Control Prices

OPEC Secretary-General Ali Rodriguez said the group had beendetermined to stem a swift decline in oil prices from a recent10-year high of $35.

"Stocks are increasing and in the second quarter we saw asharp fall in prices coming," he said. "We wanted to maintainthe stability of the market and of course of prices."

Saudi Arabia's powerful oil minister Ali Naimi said at the end of the afternoon Tuesday that consensus had been reached on the 1.5 million bpd figure. The figure was "not out of the blue," he said. "It takes into account a lot of variables."

Iraqi Ban Affecting Market

There also appears to be agreement on how to cover the shortfall caused by Iraq's current ban on oil exports. Until they come back into the market, other countries will fill their quota. Iraq's oil minister is not attending the meeting. He had previously demanded a 3 million bpd cut.

OPEC wants to cut now because it fears that if it waits until its next regular meeting in March excess oil will be flooding the market as demand falls in the spring, sending the price plummeting again.

Accounting for U.S. Economy

Another factor is the slowdown in the U.S. economy.

"When you look at the fact that the $30 oil price is going to come on top of high electricity prices and extremely high prices for natural gas as a feedstock, the pressure of all those three things together on our economy is huge," says energy analyst Amy Jaffe.

If prices continue to rise, that pressure could grow.

"A very sharp increase in oil prices and disruption in supply can push a weak economy into a full recession," says economist Lynn Reaser.

This has happened before in the U.S. Following American support for Israel in the Yom Kippur War in 1973, a Saudi-led oil embargo doubled the price of oil, producing shortages, long lines at the gas pump and an economic recession in November 1973.

The recession of 1990-1991 was brought on in part by the doubling of oil prices in the months leading up to the Persian Gulf War.

Worries of Low Inventories

OPEC last year was blamed for stirring inflation by movingtoo slowly to restore output curbs put in place after the pricecollapse of 1998.

Inventories of crude and petroleum products slipped torecord lows in 2000 and consuming nations are worried thatOPEC's new cutbacks will prevent stocks rebuilding.

"OPEC is showing that it is more determined to defend thefloor of its $22-$28 target price than the ceiling," said RaadAlkadiri of Washington's Petroleum Finance Co.

Analysts said cartel deliveries in practice were likely tosubside by closer to one million bpd than the 1.5 million onpaper because some countries were unable to meet their previousquotas.

ABCNEWS' Sue Masterman, Betsy Stark, Reuters and The Associated Press contributed to this report.