Saudi Arabia has its way on OPEC production

In a decision, that in all probability would be a step in the right direction, OPEC agreed to increase oil production by 500,000 barrels a day. The impetus to increase the production was provided by Saudi Arabia, over the objections of Iran, Qatar, Venezuela, Libya and Algeria.

The decision aims to reduce the price of oil ahead of the winter when the demand peaks and stocks decline dramatically. The decision to increase production comes as a surprise as most analysts felt that there would be no change in quotas. This production increase, the first official one in more than a year, will be effective on November 1.

Iran, Venezuela and Algeria had opposed any increase in production as they asserted that the world was adequately supplied with oil. However, Saudi Arabia had its way. Saudi Arabia stated that while global oil inventories were at a comfortable level, the ongoing tightness in the U.S. products market and the high-demand winter season necessitated that the market was adequately supplied.

Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut, said, "The Saudis are the big dogs, and they did get everyone to come around to their point of view. The Saudis have decided to step in here and play a role but maybe they've got some people ticked off at them inside OPEC."

Hailing the decision, Johannes Benigni, MD at PVM Oil Associates said, "It improves the credibility of the organization because it shows they recognize there will be more demand and are able to make the necessary increase, and to do something to avoid the market overheating."

It may be recalled that OPEC made a faux pas in 1997 when it enhanced output just before an Asian economic crisis. The crisis had curbed oil demand, leading to a price slump to $10 a barrel. This time around, the members hinted that they would keep close watch on the market and react quickly. If needed they would cut production if prices declined too much.