Gasoline prices soar on OPEC cutbacks

VIENNA, Austria -- OPEC's plan to reduce the world's oil supply by about 2.6 percent has already translated into a spike in prices at gasoline pumps in the United States and elsewhere. Formal approval of the production cuts at the group's meeting today would push gasoline prices even higher, analysts say.

The Organization of the Petroleum Exporting Countries is widely expected to approve cuts in oil output totaling 2.1 million barrels a day, in a unified effort with nonmembers to strengthen prices for crude that had languished at a 12-year low as recently as December.

OPEC oil ministers have said the organization plans to reduce daily output by its members to 1.72 million barrels. Non-OPEC producers like Mexico, Norway, Russia and Oman are expected to account for additional cuts totaling 388,000 barrels a day. The agreement to curtail production was reached two weeks ago by the group's three biggest members -- Saudi Arabia, Iran and Venezuela -- together with Mexico and fellow OPEC member Algeria. Crude prices responded by jumping almost $3 a barrel, and gasoline prices began to follow suit. "After it became evident that OPEC was going to cut production, the price at the pump really began to move quickly," said George Gaspar, an analyst with Robert W. Baird and Co., a financial services firm based in Milwaukee. The average price of all grades of gasoline at U.S. service stations surged nearly 8 1/2 cents per gallon over the past two weeks, according to the Lundberg Survey, the steepest and fastest increase since Iraq invaded Kuwait in 1990. Prices shot up more than 9 percent at self-service pumps in the United States, where unleaded regular averaged nearly $1.03 in the latest survey, compared with just over 94 cents two weeks ago, according to Lundberg. "There's no question that gas prices in North America and the rest of the world have risen because of OPEC's decision," said Doug Terreson of Morgan Stanley who spoke from his office in Houston. Analysts say OPEC's program to reduce production accounted for at least half of the rise in gasoline prices. That's because refiners, who buy crude oil and process it into gasoline, were quick to pass their higher costs on to consumers. Another factor behind the more expensive gasoline has been the approach of spring, when people usually begin spending more time in their cars. Gasoline inventories had been unusually large last fall and winter, said Fergus McLeod of the British firm BT AlexBrown. As inventories began to dwindle, gas prices began to rise from their depressed levels. A decision by OPEC to pump less oil will likely trigger a further rise in gasoline prices -- by two to three cents a gallon for every additional dollar increase in the price for a barrel of oil, McLeod said. "If OPEC gets reasonably good compliance with the production cuts, that will lead to even higher gas prices in coming months," Terreson said. In another nudge up on oil prices in anticipation of OPEC adopting and sticking by its cuts, contracts for April delivery of light, sweet crude oil rose 26 cents Monday on the New York Mercantile Exchange to close at $15.50 a barrel. Crude traded as low as $10.72 a barrel on that exchange in December. Gaspar foresees gasoline prices rising by as much as 10 cents a gallon from their current levels. The effect of cuts in oil output could continue to buoy gasoline prices into the fall, he said, when gasoline prices typically decrease slightly as colder weather makes driving less attractive. A possible glitch in the seemingly irresistible momentum toward OPEC production cuts has come in the form of a protest by Iraq. Amer Mohammed Rasheed, Iraq's oil minister, said in a report published Monday that Iraq would insist that Saudi Arabia, OPEC's largest producer, make additional cuts on its own. Iraq wants Saudi Arabia to reduce its output closer to the level it produced at prior to the Gulf War. The Saudis began pumping more oil after the war to make up for the market share Iraq lost when U.N. sanctions barred exports of Iraqi oil. Saudi Arabia, which now produces more than 8 million barrels a day, has pledged to reduce output by 585,000 barrels a day -- more than any other OPEC member. But Rasheed would insist that Saudi Arabia cut back by an additional 1.1 million barrels or more, he told the Middle East Economic Survey, a weekly oil review published in Nicosia, Cyprus. Other OPEC oil ministers seemed to play down the potential for trouble at Tuesday's meeting. "Agreement tomorrow is confirmed," said Venezuelan Oil Minister Ali Rodriguez. Members of OPEC are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

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