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Tighter Supplies Cheer Oil Nations. GLOBAL MARKETS

By Staff writer of The Christian Science Monitor / January 5, 1989



BOSTON

EVEN in an age of supercomputers and quantum physics, this planet continues to rely, as it has for a century, on oil to power its economic engine. So it's no surprise that with Western Europe, North America, and the Far East maintaining strong economic growth - and OPEC controlling its output - oil supplies are tightening.

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That's a relief to the oil producers of the world, battered by six years of declining prices. It's a bit of a worry, however, to industrial nations, since it means that energy-driven inflation is bound to get stronger.

Stable oil prices have been accomplished through uncharacteristic harmony within the Organization of Petroleum Exporting Countries (OPEC), which last year agreed to control production. The cartel is also enlisting the aid of outside oil producers. OPEC members plan to meet with seven non-OPEC representatives in London this month.

``If [OPEC] quotas are reasonably adhered to,'' William Randol of First Boston Corporation in New York noted recently, ``this raises the possibility that OPEC prices could average $15 per barrel'' in 1989 rather than the $12 a barrel they were averaging in late '88. That $15 would add a little (about half a percentage point) to inflation; that's not too bad, but it wouldn't help inflation fighters such as the United States Federal Reserve.

A move beyond $15 is unlikely, however, Mr. Randol says. Saudi Arabia and Kuwait, he notes, ``want to keep a lid on oil prices at today's target level for at least two or three years.'' If the market stays tight, he says, these two OPEC powers will lobby strongly for expanded quotas rather than a price increase.

Philip Verleger, an energy specialist with the Institute for International Economics in Washington, believes the OPEC accord will hold for now. And he notes that the industrial world is clipping along so fast that it has run out of capacity to make gasoline.

``That will lift gasoline prices,'' Mr. Verleger says. ``The last time that happened was in the early '70s. Oil exporters will see this and will do what they can to maximize their income.''

Higher income is an important need. Saudi Arabia has been running a budget deficit this year that many observers say will top $10 billion. Venezuela's deteriorating financial condition prompted it last weekend to declare a moratorium on principal payments on its foreign debt.

Steady or rising oil prices would help these nations. Banking, real estate, and general economic interests in Texas, Oklahoma, Louisiana, and other oil regions would also be benefited.

But steady or rising oil prices are not necessarily guaranteed, says Daniel Yergin of Cambridge Energy Research Associates in Cambridge, Mass. Oil buying for the winter heating season ends in late January, and ``there could be some price pressure then.''

Mr. Yergin notes that much of the tightening of the oil market recently was prompted by low oil prices. This caused users such as power plants and factories to switch to fuel oil rather than natural gas. They could be fickle if prices rise. Yergin adds that stocks of cheap oil have gone into replenishing inventories and that eventually this trend will max out.

So the oil nations could face an early test of their resolve.

``There's strong incentive for them,'' Yergin says. ``The alternative they were facing last November [the time of the OPEC accord] was oil falling to $5 a barrel.''