Can Common Interests Keep Oil Prices in Check?

Understanding that all parties would benefit, OPEC is pledging -- yet again -- to keep the cost between $22 and $28 a barrel

Finally, some good news on the energy front. Top representatives of oil-producing nations attending the World Economic Forum in Davos, Switzerland, say they want to keep world oil prices well under $30 per barrel -- less than most economists had been expecting. Lower oil prices would give a boost to U.S. and European economic growth and corporate profits.

Of course, oil-producing nations have made such promises before, only to let them go up in smoke when their oil revenues shrank. But the price cuts may have a better chance of working this year than in the past. There's a new "commonality of interests" between producers and consumers of energy as a result of the globalization of markets, contends Peter Bijur, CEO of Texaco. "There is increasingly a recognition that price volatility creates no winners."


  The U.S. economic slowdown also could help. Oil prices "rose so high last year because there was such strong demand in the U.S.," says Kassymzhomart Tokayev, Prime Minister of oil-rich Kazakstan. "But with the U.S. economy slowing, I think we can look forward to lower, steadier prices."

Exactly how far prices will fall is uncertain. But Ali Naimi, Oil Minister for Saudi Arabia, the world's biggest producer, predicts the price will hover between $22 and $28 a barrel for the rest of this year -- even while demand rises by 2%. OPEC will vary its production levels to ensure that prices stay close to this range, he says.

Economists are scrambling to ratchet up their growth forecasts. U.S. economic growth could top 2% this year, according to many of them. Meanwhile, the European economy could expand by as much as 3%, up from the 2.5% that was the consensus forecast until recently. When making earlier forecasts for 2001, most economists had assumed that the price of oil, which topped $38 last summer, would stay at or above $30 a barrel.


  Corporate profits should get a boost, too. Rising energy costs lopped an estimated 10% off profits last year. European companies, which rely on imports for most of their energy supplies, should be helped the most because each $10 fall in the price of oil saves European industry $100 billion. "What we want is steady prices at a reasonable level," says Carlo Monticelli, co-head of euro-zone economics for Germany's Deutsche Bank. "I think anywhere in the $22 to $28 level is reasonable. It's certainly better than what we were expecting six months ago."

Over the longer haul, new oil production will also help. Kazakstan's Tokayev says his nation will be able to produce more than 2 billion barrels a day by 2010, which would make it the world's second-biggest producer, after Saudi Arabia. "But however much we produce, we want to make sure that the price stays steady at well below $30," he says. "That is in our interests as well as in the interests of the developed world."

Price moderation, however, may come with political strings attached. Mohammad Hossein Adeli, Iran's Deputy Prime Minister, is also in favor of lower, firmer prices. But he adds that stability would be helped if the new Administration in Washington took "a more constructive" line toward Iran. "We want them to be friendlier toward us," he says.

Indeed, oil politics are always volatile. But for the developing world, the outlook for lower prices looks better than it has in months.

By David Fairlamb in Davos, Switzerland

Edited by Thane Peterson