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Why Opec's Ploy Will Flop

Economic Trends

Why OPEC's Ploy Will Flop

Demand for oil could fall globally

Even though the world's oil producers have agreed to cut output by more than 2 million barrels a day, the price of oil probably won't stay at its current lofty level of just under $17 a barrel for long, according to economists at Deutsche Bank in New York. Oil prices have risen 40% this year, after OPEC announced that it planned to reduce output. But the production agreement ultimately may prove ineffective, as last year's did. In addition, global oil demand, flat in 1998, shows no sign of rebounding.

According to Deutsche Bank economists Edward E. Yardeni and Debbie Johnson, global oil consumption is being held down by economic weakness in Asia and Latin America. Overall, emerging-market oil use, which makes up just under half of world demand, has fallen by 1.5% over the past year. That's quite a shift from late 1997, when demand grew by more than 5%.

China should need less oil this year, with its economy growing at the slowest pace since 1990, the two economists forecast. Chinese oil use in 1997 expanded at a double-digit pace. In Brazil, demand is down 1.3%, and Mexican demand is slipping as well. Yardeni and Johnson look for overall oil demand in Latin America to drop this year from its 1% growth rate at the moment.

In the industrial world, the picture is not much brighter. Demand for oil among industrialized nations is growing below a 1% annualized rate. Western European oil use looks "sluggish," while the U.S. has seen just over a 1% increase in the last 12 months, the economists point out, despite the strong economic growth.

While the weakness in demand does not bode well for the oil producers, it does lessen one of the main risks of higher inflation that economists have been worrying about this year. The Deutsche Bank economists expect falling oil prices to help hold consumer inflation to just a 1% rise this year. That's below last year's 1.6% gain and would be reassuring news for the inflation-wary Federal Reserve.BY LAURA COHNReturn to top

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U.S. Factories Are the Stars

Productivity sparks a new golden era

Manufacturing in the U.S. suffered last year as the Asian economic crisis depressed prices and sales. But despite the global turmoil, it turns out that the biggest hit to manufacturing profits in 1998 was the result of weak oil demand. According to new figures from the Bureau of Economic Analysis, manufacturing profits from domestic operations--including exports--fell by almost $22 billion in 1998. But more than 40% of that decline came from the petroleum industry (table). By contrast, profits in the primary-metals industry--which has been complaining about tough competition from imports--barely dropped.

The secret of how manufacturing has been able to stay afloat in tough times? Productivity. In 1998, manufacturing output per hour rose by a strong 4.2%, compared with a 2.2% increase in the nonfarm business sector. And unit labor costs in manufacturing rose by a meager 0.2%, compared with a 1.9% increase for the overall economy.

This continues manufacturing's superlative performance in the 1990s. By many measures, U.S. manufacturers are doing better than they ever have. According to a new study from the Bureau of Labor Statistics, multifactor productivity in manufacturing--which adjusts for rising capital investment--rose at a 1.9% rate from 1990 to 1996. That's better than the 1.5% rate recorded from 1949 to 1973, which was supposedly the heyday of the U.S. economy.BY LAURA COHNReturn to top

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