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OPEC and the economy
The output cut shows the cartel doesn't think the U.S. economy is as weak as the Fed does.
February 10, 2004: 7:39 PM EST
By Justin Lahart, CNN/Money senior writer

NEW YORK (CNN/Money) - The Federal Reserve is still concerned enough about the economy that it's showing little inclination to raise interest rates.

But the Organization of Petroleum Exporting Countries doesn't appear to be laboring under the same worry.

OPEC surprised oil traders Tuesday with its decision to cut its production quota by a million barrels to 23.5 million barrels a day starting April 1, and to immediately cut the daily 1.5 million barrels that's being pumped above supply quotas.

The news sent crude for March delivery up $1.04, or 3.2 percent, to $33.87 a barrel on the New York Mercantile Exchange

The cut came even though the basket of crude that OPEC keeps tabs on has been above the cartel's preferred band of $22 to $28 a barrel since late December.

So why cut production now? The official explanation OPEC is giving is that spring, with its warmer weather, could create a glut in oil supplies, but the subtext is all about the dollar.

The greenback has fallen nearly 14 percent against the currencies of the United States' major trading partners over the past two years, a stiff blow to OPEC since oil is traded in dollars around the world.

As a result, crude's rise isn't nearly as much of a boon for the Jed Clampetts of the world as it seems at first blush -- sure, they can get more rides at Disney Land with their oil money than before, but if they go to Euro Disney they won't have nearly as much fun as a year ago.

"OPEC doesn't suffer from money illusion," said Northern Trust chief U.S. economist Paul Kasriel. "It decided they want an honest dollar for an honest barrel of oil."

It also decided that its biggest customer, the United States, is in good enough shape to stomach higher prices.

Higher energy prices are commonly said to act as a tax on the economy, because money that consumers and businesses might otherwise spend on Hummers and high-speed routers goes into gas tanks and furnaces.

Because big spikes in the price of oil -- think 1973, 1979, 1990 and 2000 -- have often been contributing factors to recessions, OPEC tries to take great care in managing prices.

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Economic downturns sap energy demand, sending oil prices lower -- a situation that gets compounded by producers' tendency to go over quota to make up for lost profits.

"The issue is does OPEC think the global economy is strong enough to withstand the change in price," said Morgan Stanley chief U.S. economist Richard Berner. "It just so happens that the economies that are seeing the biggest price increases -- the United States and China -- are also the strongest."

U.S. gross domestic product grew by 3.1 percent in 2003. Official figures put growth in China, whose currency is pegged to the U.S. dollar, at over 9 percent.

The Japanese and European economies are weaker and, thus less able to absorb higher energy prices. But their currencies have strengthened against the dollar, curbing the rise in energy prices in local terms.

Still, even though the U.S. economy can take the blow of higher energy prices, it will still be a drag on growth -- one that Kasriel thinks will prompt the Fed to keep on its easy money policy in place. That, in turn, could send the dollar down further, putting pressure on OPEC to raise prices further.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.