BUSINESSWEEK ONLINE : NOVEMBER 27, 2000 ISSUE
COVER STORY The Alan Greenspan of OPEC? Saudi Arabia's oil minister, Ali I. al-Naimi, was clearly enjoying his weekend in Vienna for the OPEC meeting that ended Nov. 13. And why not? With prices stuck in the low-to-mid 30s, Saudi Arabia and the other OPEC countries are having their best financial years in two decades. Saudi Arabia alone is likely to earn $89 billion this year from oil. To guarantee those profitable revenues, OPEC is contemplating production cuts to make sure prices don't drop too sharply. Sure, Naimi says, he would eventually like to pilot OPEC in for a smooth landing at the $25-a-barrel level. But for now, OPEC is in wait-and-see mode. ''We have already made four increases,'' Naimi says. ''Indications are that inventories are going to build very fast.'' Naimi is trying to be a kind of Alan Greenspan of the oil market, hoping to stabilize prices by matching supply to global demand and growth. Saudi Arabia is the only country with significant enough spare production to play that role. So even though he's worried that $30 per barrel will slow the world economy, killing demand for oil, he would prefer to err on the side of higher prices than oversupply. It was only two years ago that crude prices hovered in the low teens and Saudi oil earnings plunged below $40 billion. NO PLUNGE. That may seem odd to Western consumers still facing high gas and fuel oil prices; U.S. inventories of crude and refined products remain very tight. Indeed, on Nov. 15, U.S. Energy Secretary Bill Richardson was in London warning that ''crude and heating oil inventories remain alarmingly, stubbornly low.'' But the OPEC ministers meeting in Vienna made it clear that increasingly, they are more worried about the potential for a glut. Their main fear is that the 3.7 million barrels of production they have added in the past few months will swamp the markets. OPEC's ministers even scheduled a follow-up meeting for Jan. 17 in case production cuts are quickly needed. ''The key thing on OPEC minds right now is making sure there is no precipitous fall in prices next year,'' says Raad Aldadiri, an analyst at Petroleum Finance Co. in Washington. The cartel's current projections indicate that global supply and demand are in fairly close tune. Longer term, traders seem to agree prices will fall as supply overtakes demand. The futures market sees an average of about $25.50 per barrel next year from a current $34.88 for West Texas Intermediate crude. So why haven't production hikes brought prices down already? Naimi insists that current pricing results from factors OPEC can't control--refining bottlenecks in the U.S., in particular. And to some extent, he has a point. Although U.S. crude inventories are now some 6% below last fall's levels, U.S. refineries are running flat out. They couldn't make use of greater supply. A major reason: Since 1980 the U.S. oil industry has cut refining capacity by 5%. Moreover, some OPEC insiders are beginning to doubt that $30-per-barrel oil is so poisonous for the world economy. ''Even at a price of $30, we see demand growing,'' says a Saudi economist. BAD GUESS. The danger is that Naimi and his colleagues will get things badly wrong. While OPEC worries about a hypothetical glut next year, consumers remain vulnerable to unusually cold weather this winter or political shocks in the Middle East. Either could quickly lead to more price spikes. But if OPEC is losing any sleep over these concerns, there was no sign of it in Vienna. That may yet come. High prices will eventually lead to more efforts by the U.S. and others to find new, non-OPEC crude reserves. And even if high prices don't send the world into recession, they'll drag down economic growth, cutting demand for OPEC oil. The question is which trend is likely to hit first. By Stanley Reed in Vienna, with Chris Palmeri in Los Angeles _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Economy: Passing a Dimmer Torch COVER IMAGE: The New President's Economy CHART: Growth Slows...As Tech Demand Weakens...Manufacturing Dips... CHART: ...The Stock Market Declines...The Trade Gap Explodes...And Corporate Debt Surges TABLE: Turbulence Ahead The Alan Greenspan of OPEC? CHART: Fill 'Er Up Can the Market Regain Its Balance? CHART: Scaling Back Expectations CHART: Losing the Investor Vote TABLE: The View from Four Wall Street Gurus Commentary: The Pitfalls of One Person, One Vote TABLE: Where the Votes Are TABLE: No Electoral College Sleight of Hand at the Polls TABLE: Tricks of the Trade Is There Any Help for the ``Hanging Chad''? Commentary: The Young and the (Still) Listless INTERACT E-Mail to Business Week Online

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