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03/22/2001

OPEC Revisited

It''s been about six months since I did an OPEC update, so with
the cartel''s recent decision to lower production for the second
time this year, I thought I''d briefly review some numbers and
add a little commentary.

First off, just to refresh your memory, OPEC has 11 members
who, taken as a whole, account for about 40% of the world''s
production of oil. They are:

Algeria, Indonesia, Iran, Iraq (under sanctions), Kuwait, Libya,
Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela.

There are many large non-OPEC producers, such as Mexico and
Russia, who generally attempt to go along with OPEC''s rulings.
Non-OPEC production, of course, then equates to the other 60%.

World energy consumption last year was approximately 76
million barrels of crude per day. The U.S. consumes 19 million
of that and we import up to 60% of our energy needs, leaving us
in an extremely precarious situation should a foreign policy crisis
erupt in the Middle East.

Global consumption in 2001 was expected to be in the
neighborhood of 77-78 million barrels, but the worldwide
slowdown is forcing a reexamination of the numbers. Obviously,
if the current economic problems we are experiencing in the U.S.
don''t begin to improve, then demand across-the-board will
soften, maybe even to below 2000 levels.

Including production from Iraq (which is highly unpredictable
and inconsistent due to UN sanctions as well as Iraqi
intransigence), OPEC produced about 29 million barrels a day
last year. With the two cuts in production thus far in 2001, they
are now talking about a 24.2 million barrel target (not including
Iraq) with the objective of maintaining the basket of crude at
around the $25 level, roughly where it is today. *[Just a
reminder, West Texas Intermediate, the price you see quoted in
the paper and on television, is the most expensive blend. The
basket includes other grades such as North Sea Brent.]

OPEC is not stupid. They recognize that while $30-$35 oil fills
their coffers, it also can lead to major economic problems,
witness the impact of rising oil (as well as natural gas) over the
past 18 months in particular. OPEC is reducing production now,
however, because they believe that prices would plummet in the
second quarter, normally a down period for demand.
Additionally, the target price of $25 should ensure steady growth
in demand, but also discourage development of alternative
sources, such as solar and wind power. At least that''s the theory.
Putting it into practice doesn''t always work out.

There is also danger in a downward price spiral. While the West
may enjoy benefits such as rising corporate profits, it has the
potential to destabilize the Middle Eastern regimes which derive
on average 80% of their total government revenue from oil.
And, of course, $10 crude like we had in 1998 is not exactly
conducive to exploration for new sources. Thus, it sets the stage
for a shock to the economy such as the one being played out over
the past year throughout the world.

OPEC also gets a kick out of complaints from the developed
world when the price of crude rises substantially above the $25
price level. After all, taxes make up about 70% of the cost of
gasoline in Europe (24% in the U.S.). Lower your taxes, the
sheiks urge when the hue and cry goes up. And they have a point.
OPEC, after all, only receives about 20% of the cost of a
"refined" barrel of crude.

A few other points. Looking ahead, once we get through this
current economic malaise, which, admittedly, could take awhile,
the trend of increasing worldwide demand for crude will resume.
In coming years, we could even be facing a far more severe
crisis. To wit, China alone may have an additional 170 million
cars on its roads within two decades. Coupled with gains in
other developing nations, that could help lead to global
consumption of 115 million barrels a day or more. [And in these
cases, alternative energy sources will be far slower in coming
than is likely in the industrialized world.] Asia, in fact, which
currently imports 60% of its oil, may see that percentage rise to
90% by 2020. As I''ve mentioned before, the search for oil may
take on a military flavor one of these days.

In addition, oil from Persian Gulf states is likely to grow from 17
million to more than 41 million barrels by 2020, so their
influence will continue to be considerable and any political
turmoil in the region will undoubtedly have an impact on prices.

And then there is the issue of natural gas. Americans paid at
least 40% more, on average, than last year to heat their homes
and businesses this winter. And the trend does not look good
going forward. 64% of new homes built the past few years use
natural gas, yet the industry has not been able to keep up with
demand, ostensibly for the same reasons as oil. Low prices in
the past were not conducive to exploration for new sources.
And, now that there is at least a price incentive to invest in
production, we are faced with the fact that it can take up to 10
years to bring these new sources on line.

Aside from the situation in homebuilding, industry now accounts
for 40% of all natural gas that is consumed in this country and it
is estimated that an additional $150 billion in pipeline projects
are needed in the next 20 years to handle demand.

So we have our work cut out for us and you can see why, long-
term, many investment analysts favor the energy sector.

Sources:

William Drozdiak / Washington Post
David Hoffman / Washington Post
Daniel Yergin and Tom Robinson / New York Times
Michael Richardson / International Herald Tribune
Jim Nesbitt / Newhouse News Service
Sean Evers and Alison Flint / Bloomberg

Brian Trumbore





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Hot Spots

03/22/2001

OPEC Revisited

It''s been about six months since I did an OPEC update, so with
the cartel''s recent decision to lower production for the second
time this year, I thought I''d briefly review some numbers and
add a little commentary.

First off, just to refresh your memory, OPEC has 11 members
who, taken as a whole, account for about 40% of the world''s
production of oil. They are:

Algeria, Indonesia, Iran, Iraq (under sanctions), Kuwait, Libya,
Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela.

There are many large non-OPEC producers, such as Mexico and
Russia, who generally attempt to go along with OPEC''s rulings.
Non-OPEC production, of course, then equates to the other 60%.

World energy consumption last year was approximately 76
million barrels of crude per day. The U.S. consumes 19 million
of that and we import up to 60% of our energy needs, leaving us
in an extremely precarious situation should a foreign policy crisis
erupt in the Middle East.

Global consumption in 2001 was expected to be in the
neighborhood of 77-78 million barrels, but the worldwide
slowdown is forcing a reexamination of the numbers. Obviously,
if the current economic problems we are experiencing in the U.S.
don''t begin to improve, then demand across-the-board will
soften, maybe even to below 2000 levels.

Including production from Iraq (which is highly unpredictable
and inconsistent due to UN sanctions as well as Iraqi
intransigence), OPEC produced about 29 million barrels a day
last year. With the two cuts in production thus far in 2001, they
are now talking about a 24.2 million barrel target (not including
Iraq) with the objective of maintaining the basket of crude at
around the $25 level, roughly where it is today. *[Just a
reminder, West Texas Intermediate, the price you see quoted in
the paper and on television, is the most expensive blend. The
basket includes other grades such as North Sea Brent.]

OPEC is not stupid. They recognize that while $30-$35 oil fills
their coffers, it also can lead to major economic problems,
witness the impact of rising oil (as well as natural gas) over the
past 18 months in particular. OPEC is reducing production now,
however, because they believe that prices would plummet in the
second quarter, normally a down period for demand.
Additionally, the target price of $25 should ensure steady growth
in demand, but also discourage development of alternative
sources, such as solar and wind power. At least that''s the theory.
Putting it into practice doesn''t always work out.

There is also danger in a downward price spiral. While the West
may enjoy benefits such as rising corporate profits, it has the
potential to destabilize the Middle Eastern regimes which derive
on average 80% of their total government revenue from oil.
And, of course, $10 crude like we had in 1998 is not exactly
conducive to exploration for new sources. Thus, it sets the stage
for a shock to the economy such as the one being played out over
the past year throughout the world.

OPEC also gets a kick out of complaints from the developed
world when the price of crude rises substantially above the $25
price level. After all, taxes make up about 70% of the cost of
gasoline in Europe (24% in the U.S.). Lower your taxes, the
sheiks urge when the hue and cry goes up. And they have a point.
OPEC, after all, only receives about 20% of the cost of a
"refined" barrel of crude.

A few other points. Looking ahead, once we get through this
current economic malaise, which, admittedly, could take awhile,
the trend of increasing worldwide demand for crude will resume.
In coming years, we could even be facing a far more severe
crisis. To wit, China alone may have an additional 170 million
cars on its roads within two decades. Coupled with gains in
other developing nations, that could help lead to global
consumption of 115 million barrels a day or more. [And in these
cases, alternative energy sources will be far slower in coming
than is likely in the industrialized world.] Asia, in fact, which
currently imports 60% of its oil, may see that percentage rise to
90% by 2020. As I''ve mentioned before, the search for oil may
take on a military flavor one of these days.

In addition, oil from Persian Gulf states is likely to grow from 17
million to more than 41 million barrels by 2020, so their
influence will continue to be considerable and any political
turmoil in the region will undoubtedly have an impact on prices.

And then there is the issue of natural gas. Americans paid at
least 40% more, on average, than last year to heat their homes
and businesses this winter. And the trend does not look good
going forward. 64% of new homes built the past few years use
natural gas, yet the industry has not been able to keep up with
demand, ostensibly for the same reasons as oil. Low prices in
the past were not conducive to exploration for new sources.
And, now that there is at least a price incentive to invest in
production, we are faced with the fact that it can take up to 10
years to bring these new sources on line.

Aside from the situation in homebuilding, industry now accounts
for 40% of all natural gas that is consumed in this country and it
is estimated that an additional $150 billion in pipeline projects
are needed in the next 20 years to handle demand.

So we have our work cut out for us and you can see why, long-
term, many investment analysts favor the energy sector.

Sources:

William Drozdiak / Washington Post
David Hoffman / Washington Post
Daniel Yergin and Tom Robinson / New York Times
Michael Richardson / International Herald Tribune
Jim Nesbitt / Newhouse News Service
Sean Evers and Alison Flint / Bloomberg

Brian Trumbore