The new lower ceilings on oil production tentatively agreed to by the 13-nation Organization of Petroleum Exporting Countries will have a relatively modest impact for the U.S. and world economies, nowhere near the disasters that occurred in the 1970s, petroleum analysts said Friday.
Oil experts said the restrictions, which probably will raise oil prices to between $15 and $17 a barrel, from the $12 rate prevailing earlier this week, probably will boost gasoline prices in the United States about 4 or 5 cents a gallon beyond the 10- to 15-cent increase that had been expected before the OPEC pact.
The restrictions, if agreed to by the Iranian government and given final approval by all OPEC delegates, also could add as much as a quarter of a percentage point to the current 4.8% U.S. inflation rate. That would all but guarantee that inflation will top the 5% mark next year--a milestone that a good many analysts had been expecting anyway.
Interest Rates May Rise
If that happens, interest rates are likely to rise somewhat as well. And the nation’s foreign trade deficit will end up $6 billion or so larger than it would have been, the result of higher prices for oil imports. The trade deficit now is estimated at about $140 billion.
But Philip Verleger, an energy expert for the Washington-based Institute for International Economics, said the most sweeping impact “will be the thing that didn’t happen"--that is, the bottom will not fall out of the oil market, as some oil analysts had feared.
Had that occurred, Verleger and other economists said, Texas and other oil-producing states would have been squeezed even more, and the bill for rescuing the ailing U.S. thrift industry would have risen even farther beyond the $45 billion to $100 billion now estimated.
The industry is in trouble in large part because its loans for energy projects have gone sour.
‘Corks Will Be Popping’
“Before the OPEC accord, there was a lot of speculation that oil prices might fall to $5 or even $2 a barrel,” Verleger recalled. “There’ll be a lot of champagne corks popping in Texas and parts of California over the weekend,” he said in an interview.
A precipitous drop in oil prices also might have worsened the Latin American debt problem, particularly in the case of Mexico, which already has fallen into a financial bind because its revenues from oil exports have proved lower than expected.
The United States recently agreed to lend Mexico about $3.5 billion to tide it over temporarily until it can obtain longer-term loans from the World Bank and the International Monetary Fund. An oil price drop to $5 a barrel or less would have wreaked havoc with the Mexican economy.
To be sure, there still is at least some skepticism that the OPEC countries will be able to enforce the new output limits, which seek to hold overall oil production by the 13 member nations to 18.5 million barrels a day during the first half of 1989, from 22 million barrels now.
Enforcement a Question Mark
“The quota seems to be a realistic one, but enforcing it will be another matter,” said David Wyss, an oil analyst at Data Resources, a Massachusetts economic forecasting firm. “They’ve agreed on quotas before, but eventually some countries have wound up cheating.”
As a result, Wyss predicted that oil prices will firm between $15 and $17 a barrel through early next year and then begin to slide down again as member countries begin to violate the restrictions.
But Verleger pointed out that this time the OPEC strategists have more insurance because they have taken pains to include Iraq in the deal, rather than try to court Iran as they have in earlier accords.
“The Iraqis would have had the power to boost their production sharply and flood the market with oil,” Verleger said, “but Iran isn’t in that good a shape and simply can’t. So the prospects that they can enforce the accord this time look somewhat better.”
For the U.S. economy, the inflation consequences are probably the most negative impact of the oil-price hikes.
Although the actual addition to the inflation rate may not be all that bad, the rise comes on top of other already intensifying inflation pressures: increases in food and commodity prices and an upward creep in wage levels.
Barry Bosworth, a Brookings Institution economist, noted that the Federal Reserve already has been under increasing pressure to push interest rates higher to cool the economy down, and the oil-price rise will only heighten those prospects.
That, in turn, could push the dollar down further, contributing even more to inflation pressures. A falling dollar means that Americans have to pay more for foreign imports and that enables domestic producers to raise their prices as well.
While a decline in oil prices would have been bad for the economies of Texas and Mexico, some analysts were hoping that it might have offset other inflation pressures here in the United States.
“A 5% inflation rate has sort of stuck in everyone’s mind as a trigger point,” Bosworth said. “This is one more piece of evidence for the Fed (to use) to tighten,” he argued.
Bosworth spoke as bond prices tumbled and interest rates surged in New York on Friday, partly in reaction to the reported OPEC accord. The Treasury’s closely watched 30-year bond dropped 5/8 of a point, while interest rates climbed to 9.17%, from $9.1% on Wednesday. Trading was light.
The expected boost in oil prices will be even more inflationary for Western Europe and Japan, which import far higher percentages of their oil than the United States does. Inflation in Japan is relatively low right now, but prices in much of Europe are accelerating.