Oil prices and pork-belly prices both hit bottom in late 1998, and both have soared more than 150% since then. Beyond that, one would be hard-pressed to imagine that an Iowa hog farmer and an
minister would have much in common. But if the two ever sat down to talk, they'd find they are dealing with similarly greased pigs.
The problem for the hog farmer is the problem that the hog farmer always has. Whenever prices go up substantially, he and his peers, seeing fat times ahead, reduce slaughter to increase the breeding herd. A surfeit results, and prices tank. Pretty soon, farmers are culling the breeding stock, which creates a shortage and starts the process all over again. It's called the hog cycle, and it shows that
Malthusian economics hasn't completely disappeared from this earth.
OPEC is meeting Monday in Vienna, and foremost in delegates' minds, points out
chief global economist John Llewellyn, is something like the hog cycle. Many OPEC members would like to increase production to take advantage of the current high prices, and other countries -- the U.S. in particular -- have been lobbying for a loosening of the taps. But OPEC worries that if it opens the taps too wide, prices will crash lower again.
Conversely, if OPEC remains too restrictive, prices could spike even higher. While OPEC members would reap some short-term benefits from that, there is a longer-term problem: High energy prices can slow world economic growth, and that, in turn, means less demand for energy. Increases in oil prices preceded the last three major U.S. economic downturns.
A number of OPEC ministers have said they would like to see crude prices drop to somewhere between $20 and $25 a barrel. This sentiment is reflected in the markets. Integrated oil and gas stocks like
remain below 1999 year-end prices. In the oil futures market, though crude for May delivery is trading at more than $27 a barrel, the November contract is trading around $24.50. Translation: Oil prices are going to come down.
If OPEC can pull it all off, that is. One of the reasons that oil ran so high over the last year is that OPEC, just like everyone else, underestimated the strength of the world's recovery after the economic crises of 1997 and 1998. And there's a chance that the world's growth will continue to surprise on the upside.
"The U.S. is proving very reluctant to slow down, and the latest data from Europe are very strong," says Llewellyn. "Everyone's agreed that the Japanese economy won't grow much this year, but just suppose we're wrong about that."
Figuring Out the Real Production Numbers
The more immediate problem would be if OPEC does not increase production by as much as expected at the Vienna meeting.
"At this time, the consensus appears to be building that that OPEC will increase output by 1
million to 1.5 million barrels per day, effective April 1," says Victor Yu, an analyst at institutional brokerage
in New York.
Recent press reports suggest that the increase will merely be based on the 23 million barrels per day quota to which OPEC decided to limit itself when it met last March, not the 24 million or so barrels per day that it is actually producing. (Such cheating is so run-of-the-mill that there is even a word for it -- "slippage.") On the other hand, tanker loadings out of the Middle East have recently picked up, suggesting that the production increase will be over current levels. Oil politics always involve a lot of Byzantine posturing.
Llewellyn says he has even heard chatter that OPEC is holding out the prospect of increased supply -- thus discouraging conservation and renewed exploration -- without the intention of following through.
Such talk is probably overdone. Though OPEC will, at times, play games, it recognizes the need to maintain its credibility. Still, to prevent a falloff in prices, it will move only gradually.
"The word is we'll get some production give here from OPEC, but it will be too little and too late to have a material impact on U.S. summer driving prices," says Steve Roach, chief economist at
Morgan Stanley Dean Witter
Even Higher Prices at the Pump?
In fact, Refco's Yu reckons that gasoline prices will head higher this summer. "Refiners are going to try and maximize their production," he says. "If you run your refineries that hard, something is bound to happen."
With gasoline stocks already low, any refinery breakdowns could have a profound impact at the pump. The average cost of unleaded gasoline was $1.54 a gallon in mid-March, according to the
Automobile Association of America
. U.S. vacationers may be dealing with something even worse than that by July 4. And economists worry that continued high energy prices bring more than a whiff of inflation into the U.S. economy.
"Implicitly, I think, consumers are assuming it's not going to get much worse than this," says Roach. With the labor market at something like full employment, sustained higher energy prices could translate into demands for higher wages, which would, in turn, drive prices higher. Inflation that stems from higher wages is typically slow to come, but it is also the most difficult to get rid of. It would mean the
, having hiked rates Tuesday for the fifth time since June, would have to get much more aggressive.
Nevertheless, economists reckon that oil prices would have to go much higher to damage the U.S. economy. "Even if prices held above $30, we wouldn't be looking at big dislocations," says John Youngdahl, senior money-market economist at
. "Something in the $50-to-$60 range would imply the danger of the same kind of dislocations we saw in the '70s."
And prices like that just don't seem to be in the cards -- OPEC is not interested in seeing its customers' economies being led like pigs to slaughter.