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Oil prices climb to 10-year high

Price of crude could bring $200 million into state coffers

Posted: Thursday, March 02, 2000

Leaders plan to slow down surging oil prices

By BRUCE STANLEYTHE ASSOCIATED PRESS

LONDON - Oil ministers from Saudi Arabia, Venezuela and Mexico agreed today that oil exporting countries should boost production to ease global oil prices from their highest levels in nine years.

Despite the announcement, oil prices rose modestly today in London and New York.

``Uppermost in our minds is to maintain stability in the markets,'' said Saudi Oil Minister Ali Naimi. ``We recognize that there is a need for additional production. The issue is when and how much.''

Oil exporters have come under intense pressure in recent weeks from the United States and other major oil-importing nations to pump more crude and bring prices down.

Oil prices have soared from $10.72

a barrel on Dec. 10, 1998, to a nineyear high of $31.77 in trading Wednesday on the New York Mercantile Exchange, largely because of a shortage of supply and burgeoning demand. Prices were up another 23 cents to $32 in trading today.

The announcement by three of the world's biggest suppliers of oil provided the clearest indication so far that consumers might see a decline in prices for gasoline and heating oil. Gasoline prices now average nearly $1.50 a gallon in the United States.

``In order to maintain the balance between demand and production, we are convinced that we have to increase production this year,'' Venezuelan Oil Minister Ali Rodriguez told a news conference.

The ministers refused to give further details on the timing of the expected increase, and they gave no hint of how large it might be.

``I think the number will be put forward when we finish our consultation with all other members,'' Naimi said.

The Saudi minister also refused to say what price he hoped to see for crude oil. ``We will leave that up to the market, for now,'' he said.

The decision reached by the three ministers is important. After the same three countries agreed last February on the need to cut production, other OPEC members and key non-OPEC producers joined them in March to make decisive cuts that sent prices surging.

Oil ministers from all OPEC member countries will decide whether or not to boost output when they meet at the end of the month in Vienna, Austria.

Mexico, a major oil producer, is not a member of the Organization of Petroleum Exporting Countries but agreed last March to cooperate with the group in curtailing output.

However, Mexican Oil Minister Luis Tellez told reporters that his country's pledge to cut production is due to expire later this month, and he did not rule out that Mexico might increase output on its own if OPEC decides not to do so.

``An increase in production is warranted and needed during the year,'' Tellez said.

The world consumes about 77 million barrels of oil a day, but production has fallen to 75 million barrels. The tight supply has forced oil companies to draw on inventories that have fallen to dangerously low levels, leading to a sharp spike in prices of heating oil, diesel fuel and, more recently, gasoline.

Crude prices are currently at their highest since the outbreak of the Persian Gulf War in January 1991.

OPEC has slashed output by 4.3 million barrels per day since it began cutting production in 1998. OPEC produces about 30 percent of total worldwide oil output.

U.S. Energy Secretary Bill Richardson said Wednesday that ``the odds are good'' for increased production, but he could not predict the size or timing of an increase.

ANCHORAGE - The price of North Slope crude oil has topped the $30-per-barrel mark for the first time since late 1990, when the nation was on the verge of going to war in the Persian Gulf.

Alaska oil ended Wednesday at $30.17 a barrel on the New York Mercantile Exchange, up $1.34 from its previous close.

The sustained price rally has the state rethinking its prediction that slope production would average just over $20 a barrel during the fiscal year that ends June 30.

``We've blown by that,'' said Chuck Logsdon, the state's chief oil economist. ``We're heading toward an average of something like $23 a barrel.''

If the upswing comes to pass, the state treasury would collect an additional $200 million or so, according to the Department of Revenue. That would shrink the state's budget gap for this fiscal year, which ends June 30, to less than $300 million.

A smaller gap would mean a smaller withdrawal from the Constitutional Budget Reserve, and lengthen the life of that savings account beyond the latest projection of January 2004.

``It extends the time we have before we reach the cliff,'' said Eldon Mulder, an

Anchorage Republican and cochairman of the House Finance Committee.

Mulder said most of his legislative colleagues are relieved to have more time to come up with a long-range fiscal plan for state government, but ``we still need to recognize the need for it.''

Rep. John Davies, a Fairbanks Democrat and Finance Committee member, called high prices a mixed blessing.

``Certainly for the state of Alaska, in the short term, it's a great deal,'' he said. But the main question for long-term planning should be whether the current price represents a trend or an aberration.

The last time North Slope crude settled above $30 was Nov. 29, 1990, about a month before the Persian Gulf War started. The price of $30.49 that day was heading down as fears of war-related oil shortages ebbed. The next day the price tumbled by nearly $4 a barrel, and $30 oil became a memory.

Prices jumped Wednesday after Venezuelan oil minister Ali Rodriguez denied reports that Saudi Arabia, Mexico and Venezuela had agreed to increase output.

The current climb in oil prices - up more than threefold in 15 months - followed an agreement last year by the Organization of Petroleum Exporting Countries to trim back its production.

Reduced production, combined with growing demand in Asia and the winter-bound Northeast, has shrunk oil inventories to their lowest level in nearly 40 years, Logsdon said.

``Most folks watching this unfold expect OPEC to increase production,'' he said. ``The market is sending very strong signals that it wants more oil.''

Rodriguez was scheduled to meet with Saudi and Mexican oil ministers in London today, but the countries probably will not say exactly how or when they will end the supply crunch, said Tim Evans, senior energy analyst at Pegasus Econometric Group.

Even if OPEC were to announce an immediate production increase, the oil would not arrive in the United States in time for April delivery, he said.

Logsdon has been surprised that the higher price has endured so long, and he says that stands to encourage more activity on the North Slope.

``There's a lot of oil up here that's attractive at $20 that's not attractive at $12,'' he said.

Ronnie Chappell, an Anchorage-based spokesman for BP Amoco PLC, said the high prices aren't tempting the state's largest oil producer to stray from its business plan.

``Typically when prices get this high, OPEC discipline starts to erode,'' he said. ``What we've seen in recent months has been remarkable, and not something on which to base long-term planning.''

But Chappell said higher prices have strengthened BP's cash flow, making more money available for drilling new wells at Prudhoe Bay and other fields.



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