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.

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