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Oil: Critical and Political

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Unless OPEC relents, expect a $2-a-gal. summer

February 21, 2000
Web posted at: 4:11 p.m. EST (2111 GMT)

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 country.

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.


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Cover Date: February 28, 2000

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