Crude Oil Price Rise Watched Nervously

The world’s biggest oil-producing countries Tuesday finally executed their long-standing pledge to cut production, introducing an element of uncertainty to a U.S. economy that has thrived on virtually zero inflation for much of the 1990s.

By themselves, rising oil prices and an accompanying jump in the cost of a gallon of gasoline will have little immediate effect on the booming American economy, according to analysts.

But coming on the heels of recent evidence of wage increases, the upward creep of some other prices, signs of economic recovery in Asia and rising protectionist sentiment against cheap imports, they are sounding alarm bells among investors and policymakers always on the lookout for signs of resurgent inflation.

Crude oil prices, which had risen 30% in anticipation of the action taken in Vienna on Tuesday by the Organization of Petroleum Exporting Countries, shared in the blame for Tuesday’s 218-point sell-off in the Dow Jones industrial average.

American consumers have already seen the effect of rising crude oil prices at the gas pump. Average gasoline prices have climbed 9 cents a gallon and could rise as much as 15 cents, according to John H. Lichtblau, chairman of the New York-based Petroleum Industry Research Institute.

But even at 15 cents, Lichtblau said, the increase would not be enough to nudge gasoline prices up to the $1.23-a-gallon average of the last three years. And in historical, inflation-adjusted terms, U.S. gasoline prices remain at their lowest levels since World War II.

Daniel Yergin, chairman of Cambridge Energy Research Associates and author of “The Prize,” a history of the oil industry, said: “Oil prices are climbing out of a very deep pit, so any price increase is unlikely to do much to the [U.S. economic] boom.”

In one aspect they might even help--by salvaging a domestic oil industry in Texas, California and elsewhere that has been crippled by recent low prices.

The increases have pushed crude oil prices from about $12 a barrel to more than $15.50 in just the last month, one of the sharpest price jumps since the 1990-1991 Persian Gulf War set off an oil-buying frenzy, analysts said. A $1 rise in the price of a barrel of crude usually means an increase at the pump of about 2.5 cents a gallon.

The increase can be traced to a preliminary decision by OPEC and some of its allies, ratified Tuesday, to trim crude oil production by 2.1 million barrels a day--or about 2.6% of global daily output--to stop the slide in their revenue.

Although OPEC has tried but failed to enforce production cutbacks several times in the recent past, oil traders are taking the latest effort seriously, in part because of an activist role being taken by No. 1 producer Saudi Arabia.

“This time there seems to be the will to make the reductions stick,” said Lichtblau. “If they don’t, these countries are in deep, deep trouble.”

The vastly improved energy efficiency of the industrial economies helped clip OPEC’s wings and had been driving crude oil prices down, in fits and starts, since 1981.

Then the collapse of Asian economies beginning in the summer of 1997 slashed world demand, contributing to a glut that persists today. Crude oil prices, which hit $40 a barrel in the late 1970s, fell to $11 a barrel by this February.

But the latest oil price hikes, together with other recent developments, might eventually revive what has seemed a long-vanished U.S. economic problem: inflation.

“These increases could have an impact . . . if they are one element in a much broader economic trend,” Yergin said.

Analysts say that signs of renewed inflation are still very tentative, but chief among the recent signs is a little-noticed reversal of the modest wage increases of the 1990s. More recently, real wages for American workers have enjoyed a steeper rise.

In addition, rising trade tensions in this country and overseas have begun to create new barriers against imported products, which is causing prices of steel and other products to rise.

Meanwhile, nascent economic recovery in Asian nations like Thailand and South Korea will tend to make their exports more expensive. And they will begin using more oil--easing the oil glut even as OPEC is cutting production.