Raising oil production

Aglow with the apparent success of its Mar. 23 agreement to trim production, the Organization of Petroleum Exporting Countries should give thought to raising output when the time is right.

No! That time is not now. But it will come, and OPEC officials need to acknowledge the inevitability of another market turn and think about how to respond.

Quick swing

The market swung quickly after OPEC agreed to reduce output by 1.7 million b/d in conjunction with cuts from nonmembers totaling 400,000 b/d. The agreement didn't take effect until Apr. 1. But by late March, benchmark crudes were trading $5/bbl higher than they had during their mid-February doldrums.

In fact, the market swung so quickly that something besides the OPEC agreement had to be at work. A late winter chill of the Northern Hemisphere helped. Refinery problems on the U.S. West Coast helped even more.

"We credit the West Coast refinery problems, and the resultant gasoline price spike, for most of the crude gains at this point," writes Purvin & Gertz Inc. in a recent report. The firm notes that at least four West Coast refineries have cut throughput because of accidents or extended maintenance. Finished gasoline and blending components from the Gulf Coast are supplementing supply there and in the Midwest, where refiners fearful of crude shortage reduced runs. Gulf Coast gasoline prices nearly doubled in the course of a month. "This has been the prime driver behind the crude rise," says Purvin & Gertz.

That makes the OPEC agreement no less important, of course. Compliance will be even more so-especially until inventories fall back to within normal ranges relative to demand. But if the market does manage to shed its stored excess and sustain oil values high enough for producers to make money, the agreement will get all the credit-or blame.

How history treats its behavior during this crucial market episode should be of vital concern to OPEC. Will the production cuts be viewed as a reasonable response to unsustainable surplus? Or will they be seen as an attempt to manufacture shortage in order to force up price?

Much of the consuming world still expects OPEC to follow the latter-inevitably self-destructive-course. OPEC needs to demonstrate that it knows better.

It needs to explain at every opportunity that the cuts it made this month were inevitable. Oil in inventory was approaching physical storage limits. Oil prices were unendurably low. Demand could not absorb the excess. The only remedy was a cutback in total production. The question was not whether cuts would occur but rather the extent to which they would be coordinated-that is, by how much OPEC members and others would trim output by agreement.

Much of the consuming world, however, will see the agreement in the light of OPEC's past failures to drive oil prices above what the market would bear. OPEC should work to change the perception. It needs to show that it understands now what it did not in the 1970s and 1980s: that supply coordination undertaken to drive up price never survives its own success; that the temptation to cheat on production limits grows as a function of price; and that manipulated markets always undercut the manipulators by shrinking.

Lingering suspicion

OPEC can assure the consuming world that it took the lessons by acknowledging that a production increase-coordinated or otherwise-will be as appropriate at some point in the future as a production cut was this month. Its members should avoid any statement or behavior that might ratify lingering suspicion that OPEC just wants to gouge consumers.

It's an intriguing public relations challenge that OPEC should undertake to further its interests in international affairs. To understand why, the group needs to look no further than the politics of global warming, one of its biggest worries. In that issue, bad ideas such as carbon taxes too readily draw support on the basis of harm they would do an exporter's group still too easy to portray as a villain.