OPEC Considers Cutting Production to Boost Prices

OPEC is again flexing its muscle in world oil markets, raising concerns that the cartel’s actions could undermine the ability of U.S. and foreign economies to get stronger any time soon, analysts said Monday.

Unhappy with the recent drop in oil prices, the Organization of Petroleum Exporting Countries is talking about slashing its production for the third time this year, perhaps within the next two weeks.

That prospect sparked a modest rally for oil on U.S. commodities markets Monday. An actual cut could send world oil prices--and ultimately prices for refined products such as gasoline and jet fuel--sharply higher again if overall supplies tighten.

Another bump in prices could dilute efforts by President Bush and Federal Reserve Chairman Alan Greenspan to use fiscal and monetary policy to jump-start the sluggish U.S. economy.

“If crude oil goes back to $30 a barrel, that’s negative not just for the U.S. economy but for the global economy,” said David Pursell, a vice president for research at Simmons & Co., a Houston investment banking firm that focuses on the oil industry.

He also noted that foreign economies already are suffering because crude oil is traded worldwide in U.S. dollars, and the dollar’s strength relative to other foreign currencies is already making oil more expensive for other countries.

“If crude was to spike again, that’s going to be a double whammy for those nations,” he said.

But Pursell and others aren’t so sure that oil prices will go higher, even if OPEC--which produces about 40% of the world’s oil--reduces the flow. Prices have fallen lately precisely because world economies are weak, which is keeping a lid on demand for oil and swelling supplies.

Crude oil for September delivery rose 18 cents on Monday to $26.12 per barrel on the New York Mercantile Exchange in response to OPEC’s talk of another production cut. But that’s barely above a 14-month low that Nymex oil reached last week.

OPEC’s focus is on the price for a basket of seven benchmark crude oils traded around the globe, and that price has been sliding since OPEC’s last meeting July 3. It now stands just above $22 a barrel--the bottom of the $22-to-$28 range that OPEC desires.

Though a threat to OPEC, the recent slide in oil and gasoline prices has been welcomed by consumers and industries reliant on fuel. Indeed, average gasoline prices in California fell again in the week ended Monday for their ninth drop in 10 weeks, the Energy Department said.

The average price for self-serve regular in California edged down to $1.722 a gallon from $1.776 a gallon the previous week, and it stands at its lowest level since April 2, according to the agency’s Energy Information Administration. After surging above $2 a gallon at many pumps this spring, the price also is now virtually unchanged from a year ago.

The average national price for gasoline also fell again, to $1.395 a gallon from $1.413 the previous week, the EIA said. Prices in California are substantially higher than those nationwide because of costs and taxes related to the state’s environmental regulations.

If economic activity remains soft and fuel supplies keep building, oil prices could move only modestly higher--or not at all--even if OPEC cuts production, experts said.

“We’re not going back to the point of $30 [per barrel] oil,” said Stephen Roach, an economist at Morgan Stanley & Co., which is predicting meager 1% growth for the U.S. economy in the latter half of this year.

“OPEC wants to hold prices in the mid-$20 range, which is consistent with my view of a muted rebound in the U.S. economy,” Roach said.

If OPEC cuts its output and world oil prices rise again as the cartel hopes, the move could backfire for the 11-member group. Higher prices could depress world demand for oil even further, setting the stage for a precipitous drop in crude prices down the road and damaging OPEC’s interests.

“The danger is that they tighten the market to the point that it’s detrimental to themselves,” Lawrence Eagles, head of commodities research at GNI Ltd., told Bloom berg News.