The world faces an oil glut and steep drop in crude oil prices if Iraq withdraws peacefully from Kuwait, because Persian Gulf producers who boosted output will be unable to cut back quickly, oil sources say.
"Saudi Arabia and Abu Dhabi will find it very difficult to slow down production in the short term if (the crisis) is called off today," a senior oil industry official said this week.The sources said new commitments to supply oil and gas and the need for extra oil revenues to help pay for defense against Iraq argue against a sudden retreat by producers to preinvasion output levels.
Oil prices could plummet from around $40 a barrel to below $20 because the current high prices are based more on fears of supply disruption through war than on real shortages, gulf oil analysts said.
Saudi Arabia and Abu Dhabi in the United Arab Emirates increased their production to maximum capacity since last month to help replace more than 4 million barrels per day of crude oil lost due to the U.N.-sponsored trade blockade of Iraq and occupied Kuwait.
The Saudis are producing about 7.7 million barrels, more than 2 million higher than before Iraq's Aug. 2 invasion. Abu Dhabi is pumping around 1.9 million barrels daily, up from 1.2 million.
Oil analysts estimate there could be a shortage of about 1.6 million barrels of oil a day in the fourth quarter because of the northern hemisphere's winter heating needs.
But a senior official of the International Energy Agency, the West's energy watchdog, said Wednesday that the current market position was manageable.
Members of the agency currently hold enough crude oil to last 99 days, and some producers want Western governments to release some of their inventories to help bring down prices.
Extra production at higher prices puts billions of extra dollars into the coffers of Persian Gulf producers, some of which is paid toward the costs of international forces stationed in Saudi Arabia.
"Producing (oil) at high levels is addictive, especially with the current high prices," said an oil industry executive in the gulf. "None of these (gulf) countries have a good record for cutting output quickly when the time comes."
The Saudis and Abu Dhabi have also committed themselves to supply crude oil to a number of developing countries.