Why the Latest Production Reduction Promises Won't Boost Oil Prices

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Hah!

The threat of rising oil prices lasted about as long as it took to read the wire service stories that declared a new kind of discipline had come to the oil producing countries. Looking at today's trading action it seems the news of oil production reduction merely scared the shorts and little else. Bonds sort of harrumphed at the possibility of slowing oil production, barely budging as news of higher oil prices rumbled through the stock market.

Low oil prices play an instrumental role in this bull market for several reasons. First, companies don't have to devote as much money to energy costs. You don't build semiconductors out of thin air. When energy costs drop, that helps profits. Moreover, when companies find that they are spending less than expected on energy, they can devote more to their favorite item: capital expenditures. In the past several years, that's meant mainly one thing: technology. More computers, more networks, more software.

Second, home energy costs and gas pump costs, when lower, leave more money in the consumer's pocket. Sort of like a big tax cut, courtesy of commodity price declines. And it's not just oil that has shown a remarkable weakness in price. Foodstuffs, precious metals and other commodities also have fallen in cost. While economists make a great deal of noise about the cost of labor -- and labor is a much larger chunk of expenses than commodities -- the drop in commodities prices has helped pin inflation to the mat while putting more money in corporate and consumer coffers.

Despite the chatter about the possibility of lower oil prices, let's look at the reality. Many of the oil producing countries find themselves in a terrible spot. They need the petrodollars badly, but the more they pump, the less money they get per barrel. It's a tough game. Everyone has to agree to take less so they can collectively get a little more money. It's like asking everyone to move slowly to the lifeboats once you've nailed the iceberg. Good luck.

Let's go down the list of major oil producers. Indonesia? These guys are desperate for dollars. They've got to be pumping every last bit of oil they can in an effort to shore up their battered economy. Saudi Arabia? The flow of oil money helps keep the fragile royal family in charge. Mexico? The country still hasn't fully recovered from the peso crisis, and its national oil company is crucial to economic growth. Russia? Yeltsin's just

sacked the government, and people are complaining every day about the lack of economic progress. Backing off on the spigot now would be a big show of trust from a fragile economy. Venezuela? Oil's the only game in town.

We could toss in some emirates and other small Persian Gulf nations, many of whom have governments that survive largely on the strength of their oil-derived largesse. And, while we're at it, toss in Iraq, ever eager to pump oil, and you've got a lot of oil-rich nations with tremendous incentive to pump more oil.

Looking through the list of oil-producing nations, Canada and the U.S. might back off a little. Norway, with its strong socialist roots, would probably back off just to be nice. But the vast majority of oil producing nations face economic and political realities that make it altogether too tempting to produce as much as they can get away with. Since OPEC has no real enforcement provisions, it's not likely that the recently announced oil production reduction scheme will.

In other words, a collective agreement to stop pumping oil from these nations is highly unlikely.

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MediaNotes:

Attention, reporters who are confounded by this market! Please don't let experts use phrases like "the trend is your friend" and "don't fight the tape." Yes, James Cramer talks about not fighting the tape, but what does that phrase really mean? It means: "Shoot, I got no clue, but the market is sure going up a lot today." How about why? Another favorite is the use of "long term." Whenever you hear that, run for the hills. It's

WallStreetSpeak

for "This dog is dead for a long time." Usage: "Yeah, Compaq got smacked up pretty good, but it's still a good long-term bet."

Allan Sloan of

Newsweek

puts the gurus in perspective in his column this week. Interesting read, even if it has that strange picture of the

Beardstown Ladies

behind a screen door.

For those who believe Cramer is all-powerful ... Kmart gained 1/16 to 16 11/16 today.

Do you think

The Wall Street Journal

editorial page is getting frustrated by

Clinton's

high approval ratings in the midst of alleged foibles. Today the paper's editors have an editorial headlined simply: William Milhous Clinton.

* * * * *

Sports:

The

Minnesota Golden Gophers

doing battle against the

Fresno State

squad tonight in the NIT semifinals.

Penn State

and

Georgia

are in the other game. The foursome elicited this great line in the

St. Paul Pioneer Press

this morning: "This could be a first for the National Invitation Tournament. The Final Four of the NIT includes players from both Penn State and the state pen." Ouch.

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On The Site:

Plenty of good items today, including an awesome

sector overview of the shoe industry, including a story on

individual companies from reporter Suzanne Kapner...A big batch of

3Com

stories, including items by

Kevin Petrie,

Herb Greenberg and

James Cramer...Chris Edmonds, our own Jayhawker, with

more on REITs...And with the markets humming, you shouldn't miss the wizardly writing provided by our markets team of John J. Edwards III, Justin Lahart, Elizabeth Roy and Heather Moore. It's the best on the Web.