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Oil price will not drop sharply - Experts: market realities are unchanged

OPEC says it wants the price of crude to drop to between $25 and $28 a barrel

Energy experts and economists interviewed by the Daily Star do not expect a drastic drop in oil prices in the foreseeable future despite OPEC's decision on Thursday to raise crude output by 2 million barrels a day.

They added that OPEC was not directly responsible for the surge in the price of oil, noting that the exaggerated reports of some speculators and the economic boom in China and other countries triggered the current abnormal demand for crude.

Saudi Oil Minister Ali Naimi has said that OPEC wants the price of oil to drop to between $25 to $28 a barrel.

OPEC's decision to raise output was welcomed by the United States and Europe."The prices which were mentioned by Naimi are acceptable to both the producers and importing countries," Thomas Wallin, president of US-based Energy Intelligence, said. He added that when the price of oil rose above the $25 level, the economies of many countries suffer.

Wallin said he feared prices of oil would stay high as long as terrorists continued their attacks on Saudi targets."The rise in the price of oil can partly be attributed to psychological and political factors," Wallin said.

Naimi assured the media on Wednesday that the kingdom had taken all the necessary steps to continue the flow of oil.

Terrorist attacks against targets in Saudi Arabia three days ago caused the death of 22 hostages, prompting some western companies to recall some of their staff from the country.

Saudi officials repeatedly said the country has been pumping more oil this month to meet the market demand."There is an abundant supply in the market which should bring oil prices down but the psychological factor is keeping this from happening," Wallin said.

He agreed there was collective underestimation of the market this year, adding no one expected that demand could jump to these levels."The high taxes on gas and fuel oil in the west have kept prices strong. However, I don't believe that these governments will drop taxes on oil."

Beirut-based economist Louis Hobeika ruled out an imminent drop in oil prices."If the governments want to control the price of gas then they should reduce taxes on it."

He added that contrary to some arguments, OPEC did not have the power to control the price of oil.

Hobeika, a professor of economics at Notre Dame University in Beirut, stressed that most oil refineries in the United States were very old and didn't have the capacity to increase oil supplies to the markets."The west and the Arab states need to invest more money to modernize their oil refineries and increase their capacities," Hobeika said.

He ruled out the possibility of reducing the price of a barrel of oil to $25."The logical price of oil is $30 to $35 for a barrel. I think this price will not cause any further panic."

Chafic Abi Said, a former advisor in Electricite du Liban (EDL), said he believed that the demand for oil would fall in the long run.

He added that Germany and other European countries are building more nuclear reactors and wind turbines to reduce their dependence on oil."Germany plans to reduce oil imports by 12 percent over the next five years once alternative energy facilities are completed."

Abi Said added that Russia was already producing more than 9 million barrels of oil a day, and most of that went to the European market.

Beirut,06 14 2004
Osama Habib
The Daily Star
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