Cheap oil may be history

OPEC: The oil cartel successfully reduces world oil production and consumers feel the effect.

January 28, 2000

IT WASN'T all that many months ago that gasoline prices in America were at their lowest levels in decades. In the fall of 1998, the price of a barrel of oil -- in real terms -- was about the same as in the early 1920s. That is no longer the case.

Last March, the 11 members of the Organization of Petroleum Exporting Countries along with Mexico and Norway, agreed to cut production by about seven percent. Unlike previous unsuccessful attempts to constrict the flow of crude oil to international markets, this agreement held.

An improving Asian economy and Americans' insatiable demand for larger sports utility vehicles assisted the cartel's pricing efforts. Americans can see the result of OPEC's handiwork every time they fill up the car. Pump prices are now about 35 to 40 percent higher than at this time last year.

Higher energy prices are also showing up in other parts of the economy. Airlines , for example, are adding fuel surcharges to ticket prices.

Will these higher prices throw a monkey wrench into the United States' smoothly functioning economy? At the moment, inventories of refined products, particularly gasoline, are low. Should gasoline supplies drop much lower, prices are bound to head up.

Most businesses seem to have absorbed the higher energy prices rather than pass them on to consumers. But if petroleum prices rise any higher, some may be forced to raise prices.

Most businesses, too, are using energy more efficiently than they were during the last oil shock. Yet, imports account for about 56 percent of U.S. oil consumption, making Americans more dependent than ever on foreign oil. OPEC's production quotas are set to expire this March.

Regardless of what OPEC days, however, the days of paying $1 a gallon for gasoline are unlikely to return any time soon.

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