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January 9, 2001

OPEC Seeks Crude-Oil Price Stability With Latest Cutback in Production
By Thaddeus Herrick and Bhushan Bahree, The Wall Street Journal

Oil Prices Provide No Relief For Slowing Economy ... Weiss comments

NEW YORK - Crude-oil prices are still high by many standards, but OPEC members, who will gather next week for an extraordinary fifth time in a year, are poised to slash production by about 1.5 million barrels.

Their reasoning lies not just in the current price of oil, but in significant worries about how quickly the U.S. and other economies are slowing. Members of the Organization of Petroleum Exporting Countries fear that if they don't tap the brakes on crude-oil production now, they could see a repeat of the 1998-99 oil-price crash that left its members with lingering economic problems at home.

That rationale may be tough for consumers to swallow, given that prices for the common U.S. light, sweet crudes only recently have fallen below $30 a barrel and gasoline prices are still at an average of $1.41 a gallon. But OPEC members vividly remember November 1997, when they increased production amid a battle for market share just as Asian economies were melting down.

Within months, the price of oil fell to the low teens, eventually bottoming out at slightly less than $11 a barrel in early 1999. "OPEC learned its lesson," said Raad Alkadiri, an analyst at Petroleum Finance Co., a Washington, D.C., consulting firm.

This time, OPEC is moving much faster, proposing to undo much of what it did last year, when it raised production by 3.7 million barrels a day in four steps as prices soared to more than $37 a barrel.

The planned cutbacks have drawn protest from U.S. Energy Secretary Bill Richardson, who on Sunday urged OPEC leaders to maintain current production levels to keep high prices from further hampering the U.S. But OPEC leaders have come to believe that too much oil is being produced.

Don't expect oil prices to come back down to the bargain prices of 1999 and early 2000. OPEC will make sure that doesn't happen again. And with the economy shifting into reverse, higher sustained gas prices will continue to erode consumer buying power and keep manufacturing and corporate operating prices high. That means the economy will slip into recession even faster.

Wall Street tends to underestimate the impact of high oil prices on consumer and corporate demand. But skyrocketing oil costs hobbled the economy and helped push it into the current slowdown. Oil prices crippled demand first in Europe and Japan, then in the United States. Oil prices also raised the cost of doing business in the form of increased manufacturing and shipping prices. Company earnings still have not recovered from last summer's oil shocks, and OPEC's plan to cut supplies will only deliver another hammer blow to already-flattened earnings.

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