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Since peaking last September at $37.80 per bbl., oil prices have tumbled to below $25. This breather from high energy costs is going to be short-lived. In the past two years, members of the cartel have stuck close to their output quotas, which they demonstrated in last week's announced production pullback. That will bring crude prices above $25 per bbl. again. Should crude top $30 for a prolonged period, it will further eviscerate U.S. corporate profits and have a deeply corrosive effect on the entire U.S. economy.
The chances are rising that OPEC will sharply curb production to both spur higher prices and increase political pressure on Washington and Israel. "The Saudis are set to do this," asserts Marvin Zonis, a political- and economic-risk expert at the University of Chicago. "They are very dissatisfied with U.S. foreign policy in the Middle East, specifically with Israel."
WHAT IT MEANS TO THE U.S. Shades of the '70s? No. Non-OPEC oil sources have increased significantly since then. But higher energy costs are like an ugly tax. Consumers shelled out an extra $50 billion last year because of higher gas prices. "The danger is that OPEC could be too successful," says Nariman Behravesh, chief global economist for DRI-WEFA, an economic consulting firm. "If they hang tough with their quotas and oil prices stay high as the world economy slows down, the downturn could be even more pronounced."
OPEC could yank the supply chain if fighting between Israelis and Palestinians escalates. "This is not a stretch," says Nicholas Sargen, chief global-market strategist at JP Morgan Private Bank. "As the violence picks up, the probability rises that OPEC could get involved again."
EUROSCLEROSIS
Europe has been getting that sinking feeling all year, an inevitable result of the U.S. economic downturn. After expanding 3.4% in 2000, the single-currency system could see its growth plummet to 1% or less this year. But here's the rub: even as the 12 member countries' economies languish, the European central bank, which conducts a single monetary policy for all euro-zone nations, has been very skimpy in lowering interest rates. After seven rate increases within a year, the ECB grudgingly dropped rates just once, on May 10--and then by a quarter of a percentage point, to 4.5%.
Why is the ECB dragging its feet? Because despite the region's subpar growth and high unemployment (8.3%), every one of the 12 euro-zone countries has inflation rates in the red zone, defined as anything above 2%. Higher energy costs, rising wages and the outbreak of livestock disease have plunged the Continent into stagflation, a brutal combination of poor growth and high inflation. That could prove to be the first big test for Europe's 2 1/2-year-old single-currency system. If the ECB fails to respond soon, it will antagonize European governments and possibly influence coming elections in Germany and France.