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Global Oil Glut Contains Subtle Dangers

Laptop Battery Whatever happened to the energy crisis? Remember those predictions last spring by the Bush administration that unless the United States expanded oil and gas drilling to federally protected lands and encouraged companies to build a power plant a day, American economic might would atrophy?

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Thinkpad The market, it turned out, took care of matters. When demand was high and energy prices rising during the first half of the year, companies responded: 2001 was the first year in a decade that domestic oil production increased, however slightly, the Energy Department said.

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Microsoft But the economic slowdown that deepened after the Sept. 11 attacks, particularly the slumps in travel and trade, have created a global oil glut that the Organization of the Petroleum Exporting Countries is struggling to control to prevent prices from tumbling any lower.

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Laptop Computers Most people see low energy prices as a boon, but they contain subtle dangers. If the price of oil falls too low, the economies of American allies from Mexico to Saudi Arabia could be threatened and the health of the domestic industry and states like Alaska and Texas eroded.

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Laptop Computer "The United States isn't just the largest consumer of oil but one of its largest producers, up there with Russia and Saudi Arabia," said Adam E. Sieminski, oil strategist for Deutsche Banc Alex. Brown. "If prices fall very low, it will be hard for a lot of American states."

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Desktop Computer The question that OPEC and the oil companies have been unable to answer is how to smooth the wild swings in the price of oil and the industry's boom and bust cycles. After the economies of Asia collapsed in 1997 and the fallout spread, the price of oil fell to about $10 a barrel by late 1998. On Sept. 20, 2000, it rocketed to $37.20, the highest level since the Persian Gulf war of 1991, only to tumble late last year.

Notebooks Gasoline prices, which some at midyear predicted would reach $3 a gallon, had dropped below $1 in parts of the United States by December.

Lenovo OPEC's response has been to try to manage world oil markets, by raising output when demand is high and cutting production when it is low, to keep the price of of crude oil in the OPEC basket within a range of $25 to $28 a barrel.

Hard Drive But OPEC's strategy of keeping oil prices at those relatively high levels eventually backfired. High prices gave non-OPEC exporters, most notably Russia, the cash to repair old wells, drill new ones, and raise overall output. OPEC cut production 3.5 million barrels a day, or 13 percent, throughout 2001 to try to prop up prices, but Russia and others did not. They, in turn, took over the market share that OPEC had relinquished, and prices continued to fall. Last week, with promises of cuts from nonmembers, including Russia, OPEC ministers agreed to reduce the group's production by 1.5 million barrels a day as the new year began.

Travelstar Any output reductions OPEC makes this year to shore up prices will be passed on to the major oil companies, all of which pump oil in OPEC territory. Typically, OPEC members direct foreign operators of joint ventures in their countries to reduce production first, before cutting their own production.

Gateway David J. O'Reilly, the chairman of ChevronTexaco (news/quote), has said that the company expected to cut production by 40,000 barrels a day, largely at projects in Nigeria and Venezuela, both OPEC members. The amount is small compared with the 2.7 million barrels a day that ChevronTexaco pumps around the world.

Laptop Parts Most analysts say that a price of $20 to $23 a barrel would provide ample revenues for producing countries without endangering a global economic recovery.

Software "From the United States's point of view, $22 or $23 a barrel of oil would be ideal from both perspectives, because the government is thinking about the future of producer countries," said Gerald J. Kepes, a specialist in exploration and production at the Petroleum Finance Company, a Washington consulting group.

Hard Drives Yet oil companies are being cautious about increasing their exploration and production budgets because of falling oil prices and uncertainty surrounding the recovery of the global economy. Light sweet crude ended 2001 at $19.84 a barrel on the New York Mercantile Exchange after tumbling to $17.45 on Nov. 15 from a peak above $32 a barrel early in the year and a post-attack peak of $28.81 on Sept. 17.

Electronics According to a survey by Salomon Smith Barney, oil companies increased spending on exploration and production 24.8 percent in 2001, the steepest jump in 20 years. The companies are expected to increase their spending on foreign projects 9.7 percent this year, but spending on domestic exploration and production, especially for natural gas, is expected to fall 14.7 percent.

Canon But when the economy rebounds, which economists expect to begin this spring, will the domestic oil industry be ready to ramp up oil and gas production? A protracted lag could lead to higher prices again, as demand rises but supplies remain constrained. "We're certainly looking at the boom-and-bust pendulum again." Mr. Sieminski, the Deutsche Banc Alex. Brown oil strategist, said.

By Neela Banerjee
New York Times - 1/2/2002

Topic: Petroleum Industry

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