WASHINGTON -- The wave of selling that rocked the bond market last week on fears that Saudi Arabia had opted to support a $3 per barrel increase in oil prices made for good news copy, but it was out of whack with some hard economic truth. The price of West Texas intermediate crude jumped $1 to $22 in reaction, and the yield on the Treasury long bond shot from 7.80% to 7.90%. The mild hysteria that hit the market was reflected in a Washington Post report that said traders were talking about U.S. inflation jumping by a full percentage point.

Cooler heads knew better and did not rush to the fire escape.

To begin with, the Saudis have a longstanding policy of keeping oil prices moderate in order to protect their own interest. In the 1980s, they concluded that they needed a large stream of oil revenue well into the next century to sustain their lavish modernization programs.

Saudi leaders know that if they push on the price pedal too hard, they will only increase Western uses of conservation, new technology, and alternative energy sources that eventually diminish dependence on foreign oil.

It is no accident that low prices in recent years resulted in a falling U.S. rig count as the energy industry in the Southwest got hammered and U.S. dependence on foreign crude shot back to 50% of total supplies.

The Saudis want to keep Americans coming back to the pump for cheap oil. OPEC production remains at high levels, says U.S. Energy Department officials, and there is no evidence that the Saudis have abandoned their long-term pricing strategy.

"We're not going to change our forecast very much at all," said one DOE official. The latest DOE forecast calls for an average cost of $19 per barrel for oil imported by U.S. refiners in 1993, up from the current $18.75.

Oil analysts point out that OPEC members have a long history of squabbling over quotas and cheating on production levels, of generally being weak enforcers of any kind of price discipline in world markets.

In the latest OPEC meeting, members agreed to maintain current production levels during the summer months but did not agree on individual quotas.

Analysts at the economic forecasting firm of DRI/McGraw-Hill in Lexington, Mass., say that crude prices were already low because the mild winter dampened demand for heating oil.

At best, the Saudis and other producers are expected to get another $1 per barrel on top of the $1 they got last with last week's price increase.

Any impact on the large U.S. economy and on inflation will be virtually negligible, says David Wyss, senior analyst at DRI. "To the U.S. economy, it's not a make or break decision, it's a nuisance," says Mr. Wyss.

A DRI advisory sent to clients said with the latest price increase, oil will still be selling well below pre-Golf war levels and even farther below 1985 levels. Prices of gasoline at the pump are expected to go up about 2.5 cents a gallon.

"The Saudis may be able to enforce higher oil prices, but that is by no means certain," DRI analysts concluded. "Oil remains in oversupply on world markets."

Federal Reserve officials can be expected to keep focused on domestic inflation, or price increases excluding food and energy.

Traditionally, Fed officials ignore oil price changes in setting policy because they have no control over them.

In any case, by the end of the year the consumer price index will probably be running around 3.5%, says Mr. Wyss. That would not be much different from now.

U.S. consumers are still getting cheap oil to fuel a mobile lifestyle. And it will take much larger increases in prices to justify fears of accelerating inflation as long as the economy continues to clunk along at a modest pace.

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