Oil: Critical and Political
Unless OPEC relents, expect a $2-a-gal. summer
If only Federal Reserve chairman Alan Greenspan could talk oil
prices down the way he does stock prices. A lot of folks are
getting edgy about the possibility that sky-high oil prices
could soon head into the stratosphere.
"It's obvious the Federal Government was not prepared," said a
chagrined Energy Secretary Bill Richardson last week at a hastily
arranged emergency "Energy Summit" in Boston's historic Faneuil
Hall. "We were caught napping." Richardson, like most oil
experts, didn't think the 11-member Organization of Petroleum
Exporting Countries could close ranks enough to limit supplies.
Yet since 1998 OPEC has taken 4.3 million bbl. a day, or about
6.5% of world production, off the market.
Last week, as oil surpassed the $30-a-bbl. mark, its highest
level since the Gulf War, the sharpest pain was being felt at the
consumer's end of the pipeline. The wholesale price of home
heating oil has rocketed up 40% in the past three months. In the
snowy and slushy Northeast, the bills now arriving in mailboxes
for home heating oil are three times as high as last year's.
Prices for gas have topped $1.50 a gal. in many parts of the
The good news is that rising petroleum prices in the past year
have tacked only about 0.5% onto inflation. And Friday's Consumer
Price Index report was encouraging. Wall Street wasn't buying,
though. The Dow shed more than 205 points last week, partly in
response to testimony by Greenspan that further interest-rate
rises are needed to subdue inflation. "There is probably some
concern that these benign [inflation] numbers can't continue
benign," says Larry Rice, chief investment officer at Josephthal
Lyon & Ross. "Everyone in the real world sits back and says, we
are paying more at the pump, so why aren't these numbers showing
up?" One reason: in today's economy, oil costs constitute 3% of
output, in contrast to 8.5% in 1981.
With U.S. oil inventories at a 23-year low, all eyes are again
focused on OPEC, which will meet on March 27. Richardson meets
this week with oil ministers from Mexico, Saudi Arabia and
Kuwait, urging them to increase production. Mexican Energy
Minister Luis Tellez says he supports a gradual easing in prices,
and there are signs that Saudi Arabia, the biggest producer,
agrees. "OPEC's new mantra is, 'Lag, don't lead, the market,'"
says Gary Ross, ceo of Pira, an energy-consulting group. "They'll
probably boost output, but not as much as consumers would like."
Any delay would spell trouble. According to one estimate,
refiners in the U.S. need an additional 800,000 bbl. a day just
to gear up for the summer driving season. So think back fondly
to last summer, when gas was less than 90[cents] a gal. You
won't see that again this year.