OPEC Grows More Comfortable With $50 Oil

VIENNA (Dow Jones)–OPEC ministers, in a clear sign that they have become
more comfortable with oil prices that once seemed very high, argued Friday that
there are no signs even $50 oil is weighing on the world’s economy.

The shift is evident in the group’s approach to this weekend’s meeting. The
Organization of Petroleum Exporting Countries’ inclination would be to cut
output to prevent a rare buildup of petroleum inventories in the fourth quarter
from collapsing prices once winter demand wears off.
OPEC Grows More Comfortable With $50 Oil

01-28 14:48: 3nd UPDATE: OPEC Grows More Comfortable With $50 Oil
DJ 3nd UPDATE: OPEC Grows More Comfortable With $50 Oil

(Updates to add comments from Dallas Fed, industry group economists on
consequences of $50 oil.)

By Selina Williams and Sally Jones
Of DOW JONES NEWSWIRES

VIENNA (Dow Jones)–OPEC ministers, in a clear sign that they have become
more comfortable with oil prices that once seemed very high, argued Friday that
there are no signs even $50 oil is weighing on the world’s economy.

The shift is evident in the group’s approach to this weekend’s meeting. The
Organization of Petroleum Exporting Countries’ inclination would be to cut
output to prevent a rare buildup of petroleum inventories in the fourth quarter
from collapsing prices once winter demand wears off.

Ministers acknowledge high prices make further cuts untenable now, but have
made clear they don’t feel pressure to push prices down by pumping more,
indicating consumers shouldn’t look to the group for relief. Oil prices near
$50 have shown no signs of damaging the world economy or oil demand in the U.S.
and China, the two biggest consumers, ministers said.

“It’s not having any impact on growth or inflation,” Algerian Oil Minister
Chakib Khelil said Friday on arrival in Vienna. “The proof is there. China is
growing much better than people thought. The U.S. is growing much better. And
the oil price, for Europe, is not that high. So where is the problem?”

OPEC President Sheikh Ahmad Fahad Al-Ahmad Al-Sabah echoed those comments
Friday, and ministers from Saudi Arabia, Algeria and Libya have as well,
showing an emerging consensus within the group that consumers can tolerate
prices that a year ago would have been considered astronomical.

At the World Economic Forum in Davos, Switzerland, a senior Saudi official
told Dow Jones Newswires that “e is a shift in the views” in the way the
Saudi government is looking at oil prices.

“It’s no longer a concern that $50 a barrel will impact the world economy,”
he said.

‘$50 Is Acceptable’

OPEC’s thinking has clearly shifted. Five years ago, the group agreed to pump
more oil if its official reference price rose above $28. Even with that price
now around $43, the group isn’t contemplating pumping more oil. Its concern is
the downside.

“Fifty dollars is acceptable,” Libyan Oil Minister Fathi bin Shatwan said.
“What is important to us is the floor.”

OPEC meets this weekend to take stock of market conditions following a 1
million barrel a day output cut agreed in December.

The group is concerned by growth in commercial petroleum inventories and
looming oversupply in the spring. Al-Sabah, who is also Kuwait’s oil minister,
said the group thinks supply could exceed demand by 1.4 million barrels a day
in the second quarter. That’s not a huge number in an 84 million barrel a day
market, but enough to weaken prices if not addressed.

“We are worried about the second quarter,” al-Sabah said. “We have to be very
careful, because we don’t want any problems with prices.”

Consumers may question why OPEC isn’t raising output now. On Thursday,
al-Sabah said the group would be willing to roll back some of the cuts made at
the New Year if necessary, but then made clear that isn’t likely to happen. The
market is well supplied, he said.

US Pressure

U.S. government officials this week have been pressing OPEC ministers,
including Naimi, expressing their concern about possible production cuts.

“We are concerned about the unevenhandedness of utilizing forecasted weak
balances for the second quarter to justify cuts at these prices,” a person
familiar with U.S. energy policy said. “To me it seems as if they’re pushing
the envelope.”

“The shift occurred a long time ago. If we don’t push back, they will
continue to push the price up,” the person said.

The chief economist of the American Petroleum Institute said OPEC is wrong to
assume $50 oil isn’t harmful to the global economy.

“There is no question that higher oil prices are not good for the economy,”
the API’s John Felmy said. “You have real wealth that is shipped abroad that
you cannot spend on goods and services at home. The cost of production of
everything goes up because of higher costs. Your competitiveness gets worst
because the US is relatively more energy-intensive than some of the other
countries. There is no question that it is a drag.”

If that drag isn’t apparent to OPEC ministers, it may be because not enough
time has passed. Oil prices didn’t hit $50 until late September and only stayed
there for about a month. Meanwhile, it could take eight to 10 years to see the
full, longer-term impact, said Stephen Brown, director of energy economics at
the Federal Reserve of Dallas.

“No questions that $50 oil is a drag and will probably be reflected in a
slowdown of consumption spending soon if sustained,” Brown said. “But it will
take a long time for oil demand to be hit. It takes a long time to turn over a
fleet of vehicles.”

Senior U.S. officials, including Federal Reserve Chairman Alan Greenspan and
members of the Bush administration, have encouraged OPEC’s tolerance of high
prices by playing down their impact, the person familiar with U.S. energy
policy said.

While consumers can handle the high prices while interest rates remain low,
they’ll start to suffer once monetary policy tightens.

“The impact of oil on the global economy is much more diminished than I think
anyone would have thought a year ago,” said energy economist Phil Verleger.
“Ali Naimi’s statement is correct as long as the central bankers maintain the
policy that they will keep control of inflation. The impact gets real bad if
they decide to raise interest rates.”

-By Selina Williams, Dow Jones Newswires; +44-20-7842-9362;
selina.williams@dowjones.com

(Peter Millard, Shai Oster, Sally Jones, Yee Kai Pin, Erik Burns and Andrew
Dowell in Vienna; Adam Smallman in Davos; and Karen Matusic in Washington
contributed to this article.)

(END) Dow Jones Newswires

01-28-05 1748ET

DJ info:
N/DJCS,N/DJOS,N/OSCM,N/OSEN,N/OSTR,N/DJS,N/DJSS,N/DJWI,N/FCTV,N/GEN,N/OPC,N/PET
N/PRD,N/TSY,N/TTN

KEYWORDS: FSN46112 CET ENERGY GENERAL

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