ALGIERS, 20 February 2004 — Citing a looming seasonal fall in demand for its oil, the Organization of the Petroleum Exporting Countries voted earlier this month for yet another surprise cut in supplies effective April 1. It says this is a preemptive measure intended to remove one million barrels per day from the market, and is needed to ensure high revenues for exporters. The decision, which was made at the 129th (extraordinary) meeting of the OPEC conference in Algiers, triggered a new price rally, to the dismay of the world’s largest energy consumer, the United States.

Saudi Arabia played the key part in the decision to reduce the organization’s overall ceiling to 23.5 million barrels per day. Saudi Arabia said remedial action was needed to prevent a price crash in the spring, when global demand for crude falls as the weather gets warmer in the northern hemisphere.

The United States is unhappy. “It is our hope that producers do not take actions that undermine the American economy... and American consumers,” White House spokesman Trent Duffy said.

But there are increasing signs that OPEC is unlikely to heed US concerns, as its 11 members seek to cash in on a buoyant market thirsty for more supplies. OPEC says the curb on supplies is justified, given predictions from the International Energy Agency that demand for oil will lag behind world supplies in the second quarter by as much as four million barrels per day. Higher prices are also needed to help cushion the impact of the falling dollar, in which crude oil is priced.

“Of particular concern to us, as oil-producing developing countries, is the falling value of the US dollar against other leading currencies,” the conference president, Indonesian Energy and Mineral Resources Minister Purnomo Yusgiantoro, said in his opening address. “This can have serious budgetary repercussions, because it reduces the purchasing power of our petroleum revenue and affects the ability of our member countries to develop their domestic economies and to invest in additional petroleum production capacities.” “While oil producers cannot take direct measures to support the dollar, we can at least minimize the impact of its decline by ensuring that oil prices remain at reasonable levels,” Yusgiantoro said. “This requires the support and cooperation of all oil producers - OPEC and non-OPEC - so that the necessary remedial measures can be taken whenever prices come under pressure, in a broad-based, timely, and effective manner.”

Members, seeking to prevent prices from going through the roof, indicated they will move to reverse their decision next month if prices keep overshooting the group’s preferred $22-$28 per barrel target. United Arab Emirates Oil Minister Obeid Saif Al-Nasseri said ministers will review oil demand and prices at their next ordinary meeting on March 31. “If the prices are too high and there is demand in the market, we will reverse the decision,” he said.

But analysts question OPEC’s resolve to really turn down the spigots while prices remain strong.

“It’s a clever move by OPEC, giving the market some support before the second quarter,” said Oystein Berentsen, head of crude trade at Norway’s Statoil.

But what pleases OPEC is seen as bad news for consumers, especially for those whose currencies are pegged to the dollar. High prices also dig a hole in the pockets of ordinary people whose spending power is vital to the health of the world economy. In the US, a combination of robust crude-oil prices and low gasoline inventories have paved the way for volatile gasoline prices. In past years, this combination has caused prices to soar above $2 a gallon in some areas. Further increases in the price of oil, which plays a central global economic role, and gasoline, which is essential to the US economy, would come at a delicate time for an economic recovery. A derailment of the global economy, in turn, could in the long run have serious consequences for OPEC by reducing demand for oil and encouraging the use of alternative sources of energy.

Yet OPEC is not the only beneficiary of higher oil prices. Its tight leash on the oil market has encouraged nonmembers such as Russia and Angola to press ahead with major development plans and ramp up output. In fact, both countries regularly send observer delegations to OPEC meetings. Russia has in the past moved to rein in output at OPEC’s request to prop up the crude market. Higher prices have, therefore, encouraged exploration in Russia where production costs are higher than in the Gulf. Russia’s output is booming for the fifth consecutive year. It increased by a staggering 800,000 bpd last year, and it has risen 50 percent since 1999 to just below nine million barrels per day this January. Simon Kukes, the chief of Russia’s largest oil firm Yukos, is confident the country will become the world’s leading oil producer, churning out 10.5 million to 11 million barrels per day by 2009. Moscow’s rising power as a major oil producer has brought it closer to OPEC: The quest for higher prices requires a common stance.

(Nassir Shirkhani is an oil-industry analyst.)