Jack Frost will keep nipping at Americans' wallets

OPEC's move yesterday to cut production means little relief for consumers from higher heating bills.

Unless the US gets hit with a prolonged arctic blast, that heating bill is not likely to be more expensive in the months ahead. But it's not going to get much cheaper either.

That's the message coming out of yesterday's OPEC announcement that it will reduce crude-oil production by 1.5 million barrels of oil per day. The OPEC action is designed to firm up the price of crude oil, which started dropping about three weeks ago. Now, energy analysts believe the cartel's actions may have temporarily slowed the fall.

"We think oil prices will moderate to about $25 a barrel this year," says Steve Pfeifer, a domestic and international oil analyst at Merrill Lynch & Co. in New York.

The OPEC move comes at a time when energy prices have once again become an inflation worry. For all of 2000, energy prices were up 14.2 percent, the largest increase since 1990, when it rose 18.1 percent during the Gulf War.

Gasoline prices were up nearly 14 percent last year after rising more than 30 percent in 1999.

"Higher energy prices are deemed the most significant risk to the economy," says Mark Zandi of economics.com, a website. "They are particularly debilitating because they act like a tax increase - it's like cutting a check to the energy producers."

Mr. Zandi says high energy prices may have been one of the reasons Federal Reserve Chairman Alan Greenspan was slower to reduce interest rates than he normally would have been. "So far, it has not affected inflation more broadly, so he feels more comfortable now," he says.

In December, reflecting the slower economy, energy prices rose only 0.2 percent, the same as the consumer price index.

But for homeowners, the cost of heating this winter has been a shock. The average price of home-heating oil has been around $1.50 a gallon, compared with $1.15 to $1.20 a gallon last winter. Natural-gas prices are even higher on a btu-basis. And electric utilities, particularly those in California, will be raising their rates significantly.

Normally, home-heating-oil prices would have fallen along with the price of crude oil. John Huber of the Petroleum Marketers Association estimates that, based on current crude-oil prices, home-heating oil should have fallen by about 30 cents a gallon. But because of the cold winter, dealers have barely been able to keep up with demand. "The refiners are working overtime - the choke point continues to be the lack of refining capacity," says Mr. Huber.

Despite a slowing economy, energy analysts expect this summer to be tight for gasoline prices as well, because of the refining issue. "Because of environmental regulations, a new refinery hasn't been built in over 20 years," says Mr. Pfeifer. "Barring a major recession, we expect tight gasoline supplies for the next two years."

Price hike at the pump

Over the short term, Bradley Proctor, president of GasPriceWatch Inc. of Dayton, Ohio, expects gasoline prices to rise because of the most recent OPEC action. Using 12,000 volunteer spotters from across the country, who send in retail gasoline prices from their area, he calculates the average US price of gasoline at $1.46 a gallon. "In the next week or two, I expect a noticeable rise in that number," he says.

However, other energy experts expect prices to continue to fall. If OPEC had not reduced supply, crude-oil prices would have dropped to $15 a barrel by mid-year, says analyst John Kilduff of Fimat Energy Futures. Now, he's predicting that the price will fall to $20 a barrel. And he expects OPEC to move again by spring. "We'll be looking at another production cutback in March," he predicts, because Iraq should be back to full production.

Iraq, one of the wild cards in OPEC, has curtailed its production in protest of United Nations rules regarding how the country gets paid for its oil sales.

The Iraqi factor

Iraq is currently producing about 630,000 barrels of oil per day, compared with its normal shipment of 2.3 million barrels per day.

Iraq's move is important because, by some estimates, the worldwide supply of oil is outstripping demand by about 1 million barrels. Some of this extra oil is going into inventory. With the OPEC cuts, that build-up will stop.

Estimating demand is difficult, says John Felmy, an economist with the American Petroleum Institute. Normally, the world consumes about 75 to 76 million barrels of oil per day. The US represents about 20 million barrels per day. But if world economic growth slows, demand for oil will fall. OPEC is trying to fine tune its production to meet this slower demand. 'It's too soon to tell what will happen," says Mr. Felmy.

(c) Copyright 2001. The Christian Science Publishing Society

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