Crude prices plunge on Saudis' planned production hike

Lower prices mean less income to fill state's budget gap

Posted: Wednesday, July 05, 2000

Crude oil prices plummeted 7 percent today after Saudi Arabia signaled it may soon begin producing an additional half-million barrels a day.

The Saudis' move was intended to cut short a relentless rise in oil prices that could threaten world economic growth.

The frenzied selloff on the New York Mercantile Exchange came on the first trading day after Monday's announcement by the world's leading oil-producing nation, which caught even fellow OPEC members by surprise. The exchange was closed Tuesday in observance of the Independence Day holiday.

Soon after the opening bell, the near-term contract -- crude for August delivery -- was down $2.25 to $30.25 a barrel.

In a development that bodes well for motorists complaining of soaring gasoline prices, other energy products also were knocked sharply lower by crude's fall.

Prices of gasoline contracts dropped 7 percent and heating oil and natural gas contracts each dipped 4 percent, although such changes generally take a few weeks to affect the retail market.

Chuck Logsdon, chief petroleum economist for the state of Alaska, said a $1 increase or decrease in oil prices averaged over a year means $65 million more or the same amount less for state coffers. He said oil prices have been ``bouncing around'' as OPEC makes announcements.

``What you see here, I guess, is anticipation that the Saudis will follow through,'' he said. ``They usually do.''

The Saudis said in a statement Monday that they will provide higher production within a few days if prices don't quickly head lower toward their preferred price of about $25 a barrel.

Logsdon said that $25 per barrel is quite a bit higher than the price the Department of Revenue predicted it would be just a couple of months ago.

Other top oil producers were caught off guard by the unilateral decision because it came less than two weeks after the Organization of the Petroleum Exporting Countries agreed on an increase of 708,000 barrels a day to try to force down prices, which have been spiraling upward for 18 months.

But prices had risen an additional 6 percent since then, and Saudi Arabia fears risking the wrath of the United States and other Western nations whose economies have been pinched by higher prices.

``Saudi Arabia obviously bent to U.S. pressure,'' said Phil Flynn, an energy analyst for Alaron Trading Corp. in Chicago.

``I think they realized that if the market didn't get more oil, it was headed to $40 a barrel ... and it would have risked harming world economies,'' Flynn said.

The new risk for the Saudis is fracturing OPEC's unity. Traders and analysts were watching closely to see if other producers, such as the United Arab Emirates and Kuwait, would also raise production, which could force prices down further than the cartel wants.

Crude prices reached a nearly 10-year high of $34.37 a barrel on March 7.

Analysts say U.S. gasoline prices, which have soared largely because of crude's ascent, could fall by a dime or more before Labor Day as a direct result of the Saudis' decision -- if it is carried out.

Empire writer Svend Holst contributed to this report.

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