OPEC Upshot: Pricey Oil Here to Stay ; the Cartel Moves to Cut Production, Which Could End Recent Declines in Petroleum Prices. Is $40 a Barrel the New 'Floor'?

Article excerpt

Here's a tip for Western consumers: Enjoy the recent moderation in oil prices while you can. OPEC is out to prove that it's still a king of cartels.

With the world awash in petroleum stocks, OPEC ministers last week decided that it's time they lowered production. Long term, they may want to set a higher floor under volatile oil prices, in part to protect themselves against losses caused by the declining value of the dollar.

More broadly, the cartel seems to have calculated that the higher prices won't curb global economic growth and that many industrialized countries - notably the US - aren't chafing to the point where they will institute aggressive conservation measures or dramatically reduce their dependence on Mideast oil.

As a result, the US may have entered an era in which the price of a gallon of regular gas will seldom slip much below $2. OPEC states appear intent on protecting themselves against unforeseen downturns in petroleum markets.

"There is too much supply out there right now and it's filling up inventories. And what OPEC wants to do is take some of that supply off market and raise the price," says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas.

If you think that oil and gas prices still seem a lot higher than they used to be, you're right - as long as you're looking at a context larger than a few months.

Oil hit a record of $55 a barrel in October. Since then it has slumped to around $40, with OPEC producing crude at its highest rate in 25 years.

That relief is welcome, but relative. Even at $40, oil prices remain around 30 percent higher than they were at the beginning of the year.

And prices may rise again soon. Last Friday, OPEC ministers agreed to cut daily oil production by one million barrels, beginning Jan. 1. They'll meet again on Jan. 30 to discuss possible further cuts.

It's also possible that this reduction will simply stabilize prices, preventing a return to last year's levels.

"This is a preventative measure. It is enough to sharpen the market," said Algerian Energy Minster Chakib Khelil, following the Cairo meetings.

Perhaps the main reason that OPEC moved now is the rapidity with which prices have been sinking. Much of this fall's decline has occurred in the past two weeks.

Thus ministers may simply be exercising caution. They undoubtedly remember the 1998 Asian financial crisis, which sent prices into free-fall.

"Nobody thinks that is going to happen today, but they want to stay ahead of the market," says Rick Mueller, a senior oil analyst at Energy Security Analysis, Inc., in Wakefield, Mass. …