PEC plans to raise output quotas Analysts: Impact will be mostly

HOUSTON -- OPEC is expected to raise its oil production quotas at its meeting in September to calm war-wary markets and to keep oil prices from overheating when talk turns to heating oil demand this winter.

Market observers say a higher quota will have more of a psychological effect on markets than add to the inventories. The Organization of the Petroleum Exporting Countries already exceeds its quotas by 1.8 million barrels a day, but a higher quota will legitimize much of that cheating.

Analysts say the cartel likely will raise the quota at least 1 million barrels per day, and possibly as much as 1.5 million.

"I don't see why they wouldn't increase the quota," said Roger Diwan, managing director of Petroleum Finance Corp.'s markets and countries group. "It will be a good way to calm the market. It will not put any more oil on the market, but it will make an impact on the psychology of the market."

Much has been made of the "war premium" pushing up prices. Talk that the United States may invade Iraq has fanned fears of a supply disruption. Some estimates place the premium in the $4-$6 range.

The Saudis have stated publicly they would make up any Iraq oil that is removed from the market because of any conflict.

Excluding Iraq, which exports under a plan administered by the United Nations, about 20 percent of the oil capacity in OPEC countries currently is not being used.

"Iraq is not producing that much oil and is exporting less than a million barrels per day," said John Lichtblau with Petroleum Research Associates. "That oil could be made up very easily from other sources."

The International Energy Agency, which represents oil-consuming countries, has called on OPEC to raise production before the end of the year to prevent a surge in prices as demand peaks during the winter.

While OPEC tries to keep prices from hurting the economies in consuming countries, the recent runup in oil price does not appear to have been a drag on the U.S. economy.

Even as prices rose to close to $30 per barrel, there have been no indications that higher oil prices have slowed the U.S. economy or had any impact on inflation.

"Gasoline prices have remained fairly stable, in part, because of a higher level of imports," said Bill Gilmer, senior economist at the Federal Reserve Bank in Houston. "Oil means a lot less these days on the domestic side than natural gas."

OPEC ministers have been sending mixed signals as to their intentions for their Sept. 19 meeting in Osaka, Japan. Those who support higher quotas include Algeria and Nigeria, which have been bringing on new production.

But there are some factors that would tend to support keeping the current quota in place until the group meets again in November.

That position is backed by officials from Qatar, Venezuela and Kuwait, all of whom have indicated they support keeping the current quota of 21.7 million barrels per day.

A series of OPEC supply curbs up to January 2002 removed 5 million barrels per day from the market. OPEC members are eager to ramp up production to capitalize on higher prices and to give the appearance that the quota is not just window dressing to hide widespread cheating.

"They don't like the image of having a quota that is totally ignored," Lichtblau said. "And it makes sense, because clearly the demand for oil is going to rise in the last quarter and first quarter of next year."

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