AVERAGE U.S. gasoline prices pushed above $1 a gallon last week for the first time since late last year, according to a government survey. One reason: The Organization of the Petroleum Exporting Countries reached an agreement to cut production of crude oil in an effort to prop up its price. OPEC and four non-OPEC countries have promised to reduce output by 2.1 million barrels a day.
Crude prices fell to around $10 a barrel last year, as the Asian economic slowdown created an oil glut. Lately, though, they've risen above $15 a barrel for May delivery on the assumption that OPEC's deal will work. Even so, oil exporters have often had problems limiting production. Some countries usually exceed their quotas, increasing the supply, driving down the price and upsetting the cartel. Can OPEC show self-restraint this time?
Economist, Regional Financial Associates, West Chester, Pa.
Yes. I think we're in store for $15-a-barrel oil at least through the end of the year, and that's a direct result of the agreement reached by OPEC and some non-OPEC oil-producing countries. The last agreement they came to, a year ago, worked relatively well. For the most part, they stuck to what they said they were going to do. The problem was that global demand just caved.
This agreement might be more successful because global demand is now stable and may even be showing signs of rebounding. On top of that, the oil-producing countries are in much more dire economic straits today than a year ago, so they have more incentive to cut production and keep prices at $15 a barrel. Net-net, they'll come out ahead if they're able to cut production and keep prices at $15 a barrel.
There'll be some cheating. They're not going to get the 2.1 million barrels in cuts they said they're going to get. But they'll get enough to keep prices from heading back toward $10 a barrel.
Chief international economist, Standard & Poor's DRI, Lexington, Mass.
I don't think this thing is going to stick. Past ones have not stuck. We're looking at a global deflationary environment with a lot of excess capacity. And demand is weak.
I would say we're going to see another year of soft growth at the global level, and a lot of these countries are desperate for oil revenues. The incentives to cheat are very high. They always are. We've seen this happen again and again, so I'm skeptical. I would see prices going back down to $12 or $13 a barrel in the next four to six weeks.
Economist, First Union Corp., Charlotte, N.C.
My opinion is that it won't stick fully. But I guess that it would stick by half. And that would be enough to keep oil in the $16-, $15-a-barrel range.
Experts in supply and demand have said that if they did enforce the whole 2.1 million barrels, they could get the price up to $18 or $20 a barrel. That would take 2.6 percent off the daily supply. But Venezuela and Nigeria are just notorious for cheating. Assuming it gets to $16, in their minds they'll say, "Oh, goody," and go for it. There was an agreement like this last spring. The price bounced up temporarily and then just fell apart.
The difference this time is that Saudi Arabia said they were going to contribute 800,000 barrels a day to the cutback. They didn't contribute anywhere near that much last time.
Chief economist, Keycorp, Cleveland
I'm just as skeptical as everyone else that these OPEC agreements will hold in the long run. The OPEC members have a long history of cheating on each other. However, quite frankly, I don't think that's going to be the most important oil-price factor over the next year or so. I think it's going to be the rebound of Asia. And a tentative rebound is already under way.
Various countries are in various stages of that rebound, but here's the point: When you look at the market for oil and oil prices, it was the collapse of the Asian economies that pushed oil prices down in the second half of 1997 and through 1998. I believe it will be the recovery of these countries that will be the fundamental factor that causes a rebound in oil prices and other commodity prices as well. So I think the last year of super-low inflation readings is behind us.