Mood at OPEC summit strained by uncertainties

RIYADH, Saudi Arabia — In September 1960, after mighty Standard Oil of New Jersey dictated a cut in the price it was willing to pay for Middle Eastern oil, an angry group of leaders from the region and Venezuela founded the Organization of the Petroleum Exporting Countries.

No one paid much attention. Two months later, a 43-page CIA report on "Middle East Oil" devoted only four lines to the new group, according to Daniel Yergin's history "The Prize."

Few would dismiss OPEC with such brevity today. Its often-squabbling members have wrested control of their oil fields from the big oil companies. They administered two price shocks to the world economy in the 1970s. And a decade after oil prices collapsed during an Asian financial crisis, unrefined crude now is hovering around its all-time inflation-adjusted peak, channeling as much as $700 billion a year to exporting nations and threatening to slow even the world's strongest economies.

That's why this weekend, when the heads of state from the 13-member group gather for OPEC's third summit ever, it should be a celebration. Yet the summit's Saudi hosts worry that the meeting could turn into a political embarrassment.

Concerned about their image abroad, the Saudis do not want to be seen as villains behind the new oil shock and are pointing fingers at speculators, institutional investors and traders. And they fret that feisty leaders such as Venezuela's President Hugo Chávez and Iran's President Mahmoud Ahmadinejad could turn the summit into an anti-American political circus rather than a sober reflection on OPEC's future.

Though awash in oil revenue, OPEC faces uncertainties. Will high prices dent demand? Or will fast-growing developing countries swallow every available barrel? How big a slice will biofuels take from the transportation market? And will climate-change accords punish petroleum users?

Oil market complicated

There is a paradox about OPEC on the eve of its summit. Decades after the group's founding, higher prices still are central to its original purpose. Yet OPEC's bland slogan for this meeting is "providing petroleum, promoting prosperity, protecting the planet."

OPEC Secretary-General Abdullah bin Salem al-Badri insists the organization doesn't "have a target price" and that it simply wants to "stabilize" the volatile oil market for consumers, producers and investors alike.

Doing that never has been easy. Yergin, speaking at a seminar in Riyadh on Thursday, said it's even harder now because the oil market no longer is simply an oil market; it has merged with gigantic high-speed financial and information markets. That makes it tougher for OPEC to exert control and for governments and companies to plan for costly long-term projects. And in any case, when prices keep climbing, OPEC may lack the will to stabilize them.

There always has been debate over how much sway OPEC has over oil prices through its production quotas, which often are poorly enforced. The group produces about 40 percent of the world's oil. Just as important, it also sits on more than three-quarters of the world's oil reserves, and most members limit development of those resources.

Never a cohesive group, OPEC is loosely divided into two main camps. The Saudi-led group of sparsely populated Persian Gulf nations tends to favor relative moderation in pricing to avoid destroying demand. More heavily populated countries are content to watch prices — and revenue — climb higher. But the two sides are not far apart.

Saudis wield most power

"In our opinion, the real price of oil is not the one we're observing," said Iran's new oil minister, Gholamhossein Nozari. But he showed little anxiety about its impact on consuming countries: "We are seeing that growth is continuing. It seems that countries have been resilient in the past few years and able to cope with high oil prices."

Ultimately, power in OPEC is wielded largely by Saudi Arabia, which holds the overwhelming majority of the cartel's spare production capacity. That, plus its willingness to trim production to boost prices, makes Saudi Arabia the group's swing producer.

"OPEC is an organization that is supposed to have big say on the market," said a Saudi government strategist who spoke on the condition of anonymity. "Instead, it is an organizational front for the policy of one country while giving a lot of publicity to countries that wouldn't get as much attention otherwise."

Other OPEC nations are producing near maximum capacity. War-torn Iraq is far short of its production peak. Its oil minister said Thursday that production was up to 2.5 million barrels a day. About one-third of Nigeria's production has been shut down by an insurgency. Venezuela's disputes with foreign oil companies and the country's oil-patch professionals has led to sagging output. And Iran, thanks to its stubborn bargaining and international economic sanctions, has been unable to lure foreign expertise and investment to exploit its big oil and gas reserves fully.

Altogether, these developments have sliced at least 2.5 million barrels a day, or about 8 percent, from OPEC output without any organizational decision to restrict production.

The Saudi kingdom, however, is in the middle of boosting production capacity to 12.5 million barrels a day by 2009, up from 11.3 million. Saudi Oil Minister Ali al-Naimi says ample inventories indicate there is no need to pump more oil now, although some Saudi officials say the kingdom will do that next month anyway to force down prices.

But if OPEC forecasts are wrong and consumption outpaces production, OPEC then could become no different from non-OPEC producers, simply pumping as fast as possible while the price finds a balancing point.

Economists say it is difficult for any cartel to survive for long. Artificially high prices tend to bring suppliers into a market or drive customers to substitute other materials. But in the oil industry, those alternative paths are lengthy ones. New oil supplies take years to find and develop, and they tend to be in more and more difficult places.

But other issues are likely to divert attention from substantive matters at the weekend summit, especially with Chávez in town. Saudi officials say the Venezuelan president has long sought to arrange a visit in Riyadh, and he is coming — at Saudi expense — with family members and a delegation of more than 200.

Even without criticizing President Bush, Chávez is likely to be provocative. He suggested this week that OPEC nations set aside tens of billions of dollars to subsidize purchases of petroleum by poor nations. Saudi officials have asked Chávez to keep his remarks today brief, but he may be just getting warmed up.