Published: January 17 2001 19:59GMT | Last Updated: January 17 2001 20:15GMT The moderation in oil prices during most of the 1990s was extremely helpful to the world economy. And in spite of lower revenues the Gulf oil producers still have big investments in the west. That is the first of three reasons for the Organisation of Petroleum Exporting Countries to be cautious in the round of production cuts that have started in Vienna. The second is that promoting stability and steady growth in the developed economies is also the best way to expand the market for Opec crude oil over the medium term. Third, excessive production cuts that pushed oil prices back above $30 a barrel would further increase the incentive for oil companies to raise non-Opec output. The steep rise in oil prices from $11 a barrel two years ago to $34 for Brent crude last autumn has encouraged the oil companies to raise their investment in exploration and production by almost a fifth this year. This follows a decade in which world oil demand rose by only 1 per cent a year. Non-Opec production increased at twice that rate. These were strong motives for Opec to set a target price of between $22 and $28 a barrel. That looks moderate compared with the 1970s, when the oil price reached $70 a barrel in today's money. But in the four decades after 1930 real oil prices were rarely more than $13 a barrel. Opec's target is therefore a political and economic compromise designed to maximise the cartel's revenue without unduly hurting the western economies. And because the west has become progressively less dependent on oil, the target is not economically threatening. It is high enough to maintain the pressure for conservation with only a moderate impact on inflation. Still, it is in both sides' interest that the price should be closer to $22 a barrel than $28. The decision to cut production by 1.5m barrels a day was no doubt partly a reaction to the "mistake" it made in 1997. An increase of 2.5m b/d was made just as demand started to weaken as a result of the south-east Asian financial crisis. The oil price halved. Now, as the US economy slows, a small cut may indeed stabilise the price. But given the uncertainties about Iraq's output and the slowdown in US economic growth, the cartel should proceed with caution. Even after last year's production increase of 3.7m b/d, the cut was too big and too early in terms of Opec's own objectives. Instead of rushing towards further cuts in March, as some members want, it should allow prices to stabilise at a lower level and then switch off the taps only gradually to keep them close to $22 a barrel. _______________________________________________ Crashlist website: http://website.lineone.net/~resource_base
