OPEC output hikes see opposition
Iraq, Indonesia join cartel members against winter increases
LONDON, — OPEC price hawks kept
the heat under world oil markets on Thursday as Iran and Indonesia joined a
chorus of cartel members opposing any release of extra output onto
global markets this winter.
OIL-DEPENDENT WESTERN economies are keen
for more supply from the Middle East-dominated group to avoid damaging price
spikes, but the hawks argue that prices are rising on Washington’s
saber-rattling at Iraq, not because of a real shortage.
International benchmark Brent crude oil futures edged 10 cents lower to
$26.85 a barrel by mid-afternoon in London, while
New York futures shed 12 cents to $28.22.
But both markers are still hovering near
their highest level since the September 11 attacks on the United States,
having jumped by a third since the start of the year.
Iran and Indonesia on Thursday joined fellow OPEC members Kuwait and
Venezuela in arguing against any relaxation in output curbs when ministers
meet to decide policy on September 19.
The Organization of the Petroleum
Exporting Countries has curbed output by 20 percent since the beginning of
2001 to keep prices up.
“Iran believes market fundamentals do not warrant a production increase. The
price is high because of the war rhetoric,” an
OPEC delegate told Reuters.
Oil importing countries believe that
inventories could get dangerously low by the end of the year without extra
supply from OPEC. The U.S. government’s Energy Information Administration
has called for the cartel to raise quotas by a
million barrels daily from the current ceiling of 21.7 million barrels per
day.
SILENT SAUDI ARABIA
Iran is OPEC’s second largest oil
exporter, but it is still dwarfed by Saudi Arabia, which has yet to publicly
state its position ahead of next month’s meeting.
A Gulf source who is also a senior OPEC delegate told Reuters earlier this
week that the 11-member cartel was on course to
increase output from October 1 to meet expected demand growth, despite the
public opposition from other countries.
Two top U.S. government officials laid
out the case for a pre-emptive strike on Iraq this week, arguing that the
risk of inaction was greater than the risk of action.
Oil traders fear that a U.S. assault on Iraq would cause chaos in the whole
of the Middle East, home to two-thirds of world crude reserves.
Saudi Arabia has made no secret of its
opposition to a military campaign against Iraq, saying it would not allow
U.S. forces to use its bases for such an operation.
U.S. President George W. Bush met with the Saudi ambassador to the United
States earlier this week and pledged to consult
allied nations before taking a decision.
White House spokesman Ari Fleischer said it was not clear whether Saudi oil
production policy came up in the discussion, but he reiterated U.S.
confidence that Saudi Arabia would not use its control over vast oil
supplies as a political weapon.
A steady flow of Saudi oil has been
the cornerstone of the U.S.-Saudi alliance, which is being tested by
criticism from some Americans that Saudi Arabia is
not doing enough to prevent terrorism.
© 2002 Reuters Limited.
War fears and
market jitters
The oil price approached $30 a barrel over the past week on
fears of an American invasion of Iraq. The real danger the war poses may be
of an interruption in the supply of oil from Saudi Arabia, which sits on a
quarter of the world’s reserves
THE CURRENT gyrations in the oil price are a reminder of one
possible side-effect of any American war against Iraq. With fears mounting
that the American economy may relapse into a “double-dip” recession, the
last thing it needs is a higher oil price. But, just as the price of West
Texas Intermediate, the benchmark for American crude oil, was subsiding
after a surge, a speech by Dick Cheney, the American vice-president, a week
ago, calling for action against Iraq, sent the price soaring again. Matters
were not helped by a statement from Venezuela that the Latin American oil
producer would oppose any relaxation of supply quotas at this month's
meeting of the OPEC oil producers cartel in Japan. The combination of talk
about a possible war against Iraq and continuing supply concerns is likely
to keep the oil market jittery in the short term.
Iraq sits on the world’s second-biggest oil reserves, well
over 100 billion barrels—or 100 years of production at current rates. So
there are understandable fears about the interruption of supplies if America
launches a war to depose Saddam Hussein, the Iraqi dictator. However, those
fears may be overstated.
This is not because the Iraqis are—somewhat optimistically—claiming that the war would not interrupt supply. (The Iraqi planning minister, Hassan al-Khattab, insisted on August 29th that the country would continue to export even if attacked.) It is rather because Iraq's production and exports are already a fraction of their potential.
The effects of United Nations
sanctions and Mr Hussein’s own disastrous economic policies have already
sharply reduced Iraq’s oil exports. On September 2nd, Iraq said that
American and British “unfair” pricing policies had reduced exports from 1.7m
barrels per day (bpd) last year to just 800,000 bpd last month.
Of more concern is what may happen to the oil fields of
Kuwait and Saudi Arabia. Iraq suffers UN sanctions as punishment for the
invasion of Kuwait in 1990 and because of fears that it retains the sort of
weapons of mass destruction that it has used in the past. Kuwaiti and Saudi
officials are both, in contrast to their countries' stances during the 1991
Gulf war, distancing themselves from American opposition to Mr Hussein. In
the volatile atmosphere of the Middle East, with widespread resentment of
repressive regimes across the region, disruption of supplies in neighbouring
countries cannot be ruled out.
There is also a small chance that American policy towards Saudi Arabia may
change. While it has long been America’s closest ally in the Middle East,
the relationship has recently come under strain. No fewer than 15 of the 19
suicide hijackers responsible for the attacks on New York and Washington
last September were Saudi citizens, as is Osama bin Laden, the assumed
mastermind of the atrocity.
Worried about unrest on the street—many Saudis seem to prefer the elusive Mr
bin Laden to the corrupt ruling dynasty—the Saudi government gave no support
to America’s campaign in Afghanistan, and it has refused to allow America to
use its bases in Saudi Arabia for attacks on Iraq. On the contrary, the
government has instead been talking of revitalising trade with Iraq, and of
reopening a border crossing closed since the Gulf war.
In turn, one researcher from the Rand Corporation, a think-tank, recently
told a Pentagon briefing that Saudi Arabia was America’s true enemy and that
its oil fields should be seized. While the administration officially moved
to distance itself from this briefing, Donald Rumsfeld, America’s defence
secretary, seemed to confirm that at least some officials shared the dismay
at Saudi policy by saying that the views expressed were not dominant” in the
administration.
Quite apart from its diminishing value as a military ally, Saudi Arabia has
worked to maintain discipline in the OPEC oil-producers’ cartel, and to keep
prices up, at around $25 a barrel, well above what many economists think
would be their market level in the absence of OPEC. This clashes directly
with the interests of America, the world’s biggest oil importer. Prince
Turki al-Faisal, until a year ago the Saudi head of external intelligence
and brother of the foreign minister, said this summer that Saudi would never
use oil as a weapon against America. But Saudi’s oil minister, Ali al-Naimi,
spent last autumn on a tour of oil-producing capitals, trying (unavailingly)
to bully producers into production cuts. OPEC recently admitted that its
members had exceeded their production quotas by 1.8m bpd in July. On
September 1st, Rilwanu Lukman, OPEC's president, said the cartel should be
careful not to tip the oil market into oversupply by raising production too
mucho.
The current overproduction suggests that, whatever the short-term
war-influenced gyrations may be, the trend of the oil price may be downwards
over the medium term. After the late-1990s boom, economic growth around the
world has slowed dramatically, with a corresponding impact on the demand for
oil.
The supply of oil is no longer controlled as tightly as it was during the
1970s oil shock. Russia has emerged as an important producer—it is now the
world’s second-largest exporter, and its need for cash is such that it
routinely undermines OPEC’s attempts to limit global production. This in
turn reduces the incentive for other non-OPEC producers, such as Norway and
Mexico, to agree to production cuts. Besides losing revenue, they might also
lose market share to the Russians.
Even Saudi Arabia itself must be tempted to produce more oil, to pay for its
extravagant public sector. While its oil is the cheapest in the world to
produce—it costs just $1 per barrel to lift it from the ground—it is
estimated that the country’s bloated bureaucracy requires a price of $15 a
barrel to sustain itself. It is a sign of how much the world has changed
that America may now be looking not to its old ally, Saudi Arabia, to keep
the oil flowing through a war, but to the old Cold War enemy, Russia.
Consumer Spending Rises, Incomes Flat
By Jeannine Aversa
Consumers, the mainstay of the economy, splurged in July, increasing their
spending by 1 percent, the largest advance in nine months, the government
reported Friday.
Free-financing, especially on cars, discounted merchandise and other
incentives motivated shoppers to spend. Warm weather in some parts of the
country also induced people to hit the malls.
While the increase in consumer spending, reported by the Commerce
Department, provided a dose of good news for the struggling economic
recovery, another figure in Friday's report seemed less encouraging.
Americans' incomes, which includes wages, interest and government benefits,
were flat in July, reflecting the stagnant jobs market. Wages and salaries
actually dipped by 0.2 percent.
Income growth is the fuel for consumer spending, which accounts for
two-thirds of all economic activity in the United States.
The income picture was weaker than the 0.2 percent increase many analysts
were predicting. But the spending side was stronger than the 0.7 percent
advance that was forecast.
Consumer spending in July went up twice as fast as the 0.5 percent increase
posted in the previous month. But the flat reading on incomes contrasted
sharply with the 0.7 percent advance seen in June.
July's spending increase was the largest since October, while the showing on
incomes was the weakest since October.
The shape of the recovery ultimately will be determined by consumers and the
willingness or reluctance of businesses to spend and invest in the months
ahead.
So far, eroding consumer confidence, the roller-coaster stock market and a
stagnant job market haven't caused consumers to dramatically scale back
spending. That's because those potentially negative factors have been offset
by positive ones, including rising home values, low interest rates and a
refinancing boom that has left people with extra cash.
Retail sales were solid in July, helped out by free-financing for cars, and
home sales for the month were strong.
While more recent back-to-school sales have been sluggish, that should be
offset by what economists expect will be robust auto sales for August.
Friday's report showed that consumers ratcheted up spending on big-ticket
"durable" goods, including cars and appliances, by 3.7 percent in July,
following a 1.6 percent increase in June.
Spending on durables, such as food and clothes, and services each rose by
0.6 percent in July. That compared with a 0.7 percent advance in durables in
June and a 0.2 percent increase in spending on services.
Disposable, or after-tax, incomes rose by 0.2 percent in July, following a
0.7 percent increase.
With spending outpacing income growth in July, the nation's personal savings
rate — savings as a percentage of after-tax income — dipped to 3.4 percent
in July, the smallest since December. In June, the savings rate stood at 4.2
percent.
After bolting out of the gate with a brisk 5 percent growth rate in the
first quarter, the economy stumbled in the spring, growing at an annual rate
of just 1.1 percent.
Analysts believe the economy picked up a bit in the current quarter, with
some estimates ranging from growth rates of around 2 percent to 3 percent.
They said economic growth would have to be stronger for businesses to
vigorously add to their payrolls and trigger a hiring wave.
For the second half of this year, some economists are predicting sluggish to
moderate economic growth.
Hoping to give a boost to the recovery, the Federal Reserve has held
short-term interest rates steady all year long.
Businesses, concerned about accounting scandals and economic uncertainties,
have been wary of making big commitments to hiring and capital investment,
factors restraining the recovery.
The economy's struggles pose a challenge for President Bush and will be a
key topic for voters heading into the November elections.
© 2002 The Associated Press
EU cleared to impose $4bn sanctions on US
By Michael Mann in Brussels and Nancy Dunne in
Washington
The European Union on Friday won the right to impose a record
$4bn (€4bn) of sanctions on US exports in a dispute over a US corporate tax
break scheme.
A World Trade Organisation arbitration panel backed the EU's calculation of
the value of the tax breaks - which have benefited companies such as
Microsoft and Boeing - and rejected US claims that the damages should be
closer to $1bn.
The ruling is likely further to strain transatlantic trade relations,
already troubled by the dispute over US steel tariffs.
The sanctions are more than 10 times the total the WTO allowed the US to
impose on the EU in disputes over bananas and beef.
The EU can impose the sanctions immediately. But it has said it will allow
the US time to repeal the offending legislation, which the WTO declared
incompatible with its rules earlier this year.
But the European Commission called on Washington to act by November's
congressional elections.
Pascal Lamy, EU trade commissioner, said: "We are satisfied by today's
decision that makes the cost of non-compliance with the WTO clear.
"The arbitrators have . . . given us an amount of potential counter-measures
which will create a major incentive for the US to eliminate this huge
illegal export subsidy."
The Commission stressed sanctions would be the last resort and reiterated
its belief that the US administration was trying to comply with the WTO
ruling. Officials insisted no link would be made between the tax and steel
disputes.
Robert Zoellick, US trade representative, expressed disappointment about the
size of the potential sanctions but predicted that "today's finding will
ultimately be rendered moot by US compliance with the WTO's recommendations
and rulings".
He said the administration was working closely with Congress "to fully
comply with our WTO obligations". But US officials saw little possibility of
a bill passing this year.
Legislation introduced by Bill Thomas, chairman of the House ways and means
committee, has been blocked by Democrats and Republicans with big exporters,
such as Microsoft and Boeing, in their districts.
Stuart Eizenstat, a former senior Clinton administration trade official,
said: "This is a time for statesmanship, not retaliation.
"Sanctions would badly damage both the struggling EU and US economies."
He urged Congress not to "overreact by precipitously passing legislation
that does not maintain US competitiveness".
The Commission is expected to publish a draft list of possible targets for
retaliatory duties in the next 10 days, based on an indicative list from
November 2000 which named 95 sectors, ranging from live animals to toys, but
without naming specific products.
The European business group, Unice, fearful of the damage caused by more
expensive imports, warned the Commission against rushing into sanctions
before giving the US time to comply.
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