OPEC considers increasing output by up to 1.5 million barrels

LONDON -- OPEC members are debating whether to make an exceptional increase in oil output of up to 1.5 million barrels a day, in an effort to calm markets nervous about worsening unrest in Venezuela and a possible war against Iraq, a source at the cartel said Tuesday.

Such a hike in production would represent a sharp and sudden reversal in OPEC policy. The Organization of Petroleum Exporting Countries decided less than a month ago to slash its output by as much as 1.7 million barrels a day in the hope of preventing a price crash when seasonal demand dips this spring.

However, since OPEC's Dec. 12 decision, worrisome signs of a potential shortage have begun to appear.

Oil shipments from Venezuela, normally OPEC's third-largest producer, have dwindled by some 80 percent due to a month-old strike aimed at forcing the country's president, Hugo Chavez, from office. A U.S.-led attack on Iraq would halt exports from that country, which has the world's second-biggest crude reserves after Saudi Arabia.

Meeting the demand

OPEC officials have said the group cannot pump enough additional crude to make up for a simultaneous loss of exports from Venezuela and Iraq. Market fears have driven crude prices well above the psychologically important threshold of $30 a barrel as a result.

OPEC oil ministers have consulted by telephone over the past three days to try to decide how to respond, said the source, speaking on condition of anonymity from the cartel's headquarters in Vienna, Austria.

OPEC's 11 members supply about a third of the world's crude.

Iraq doesn't participate in the group's production agreements because the United Nations oversees the bulk of its exports.

Saudi Arabia, OPEC's most influential member, has proposed that the group raise its output by 1.5 million barrels a day -- or 6.5 percent of its official target -- to try to dampen prices. Several other OPEC members agree on the need to pump more oil but have been reluctant to go as far as the Saudis, the source said, attributing his information to an earlier conversation with OPEC Secretary General Alvaro Silva.

"He said most of them are considering 1 million (barrels a day). Only the Saudis are saying 1.5 million," the source said Silva told him.

Algeria and Libya are among the five or six member countries advocating an increase of 1 million barrels a day, the source said.

Adam Sieminski, an oil price strategist at Deutsche Bank, argued that OPEC is trying to put "an official stamp" on the decision many of its members have already made to ignore the production cuts they agreed to last month. The cuts were to have taken effect Jan. 1.

"They're not going to materialize, not until Venezuela is back in the market," Sieminski said.

Venezuela's exports have plunged due to the strike by at least 2 million barrels a day -- roughly the same amount of crude that Iraq exported daily in December, analysts said.

OPEC's ministers haven't reached a decision yet, and they were expected to continue their talks into the weekend, the OPEC source said.

They aim to reach a consensus by next Wednesday, the likely deadline for action on a separate output-adjustment agreement that OPEC members put in place long ago. Under this agreement, OPEC has approved a production increase of 500,000 barrels a day if its benchmark crude price exceeds $28 a barrel for 20 consecutive trading days.

The OPEC benchmark price is calculated one day after each trading session. On Monday, the benchmark price was $30.71 a barrel. Monday was the 14th consecutive day on which the price exceeded $28.

OPEC has been selective about applying its output-adjustment mechanism in the past, but current market conditions suggest members would face strong pressure to do so this time.

Crude prices eased somewhat Tuesday. February contracts of North Sea Brent crude fell 42 cents a barrel to $29.78 in midday trading in London. In New York, the price of light, sweet crude for February delivery tumbled 53 cents to $31.57 a barrel.

Despite the recent run-up in prices, OPEC faces a thorny challenge if it decides to boost daily production by as much as 1.5 million barrels.

Its main concern is that it might increase supplies just as seasonal demand for crude begins to fall in the spring. OPEC's nightmare is that an increase in output would coincide with weakening demand, a resumption in Venezuelan exports and a lightning war in the Persian Gulf that causes only a brief interruption in Iraqi exports.

Analysts say such a hypothetical confluence of events could create a glut of crude and cause prices to weaken.