Published: January 2 2001 19:28GMT | Last Updated: January 3 2001 05:15GMT It is some consolation for the slowdown in world economic growth to be accompanied by a decline in the oil price. Although weaker oil prices are partly the result of weaker demand, they should help soften the landing for the global economy. And the weakening of the oil price, from a high of $35 for a barrel of Brent crude last October to the present level under $25, may well continue in the coming months, notwithstanding Tuesday's rally. This came in response to a call by Saudi Arabia for Opec to cut output at its next meeting in mid-January. It seems that the markets, which only a month ago totally ignored the temporary interruption in Iraqi exports, are taking the threat of a Saudi-led Opec production cutback seriously. But that does not necessarily mean that a single cutback - coming after four successive Opec production quota increases last year - will succeed in stabilising the price. Many in the world oil industry and markets have become as convinced as Opec that the world is over-supplied with oil at present. Such over-supply is not always obvious if one only looks at industrialised countries. These have adopted just-in-time deliveries of oil, as of other commodities, and can therefore often carry smaller stocks than developing countries. Nor is it easy to track the position in countries such as China, where stockpiling appears to have contributed to last year's run-up in the oil price. Because industrialised economies operate on lower stocks than in the past, small imbalances in supply or demand can have disproportionately large effects on the price. These swings are in turn compounded by speculative oil trading. With the marginal cost of extracting an extra barrel of oil from existing fields as low as $4-$5, Opec countries are in one sense less vulnerable to this price oscillation than non-Opec producers. The latter often have to struggle in rough terrain or seas, where the marginal cost of finding and extracting a barrel of oil can be as high as $14-$16 a barrel. So it is no surprise that the international oil companies still feel nervous after the 1998-99 drop in the oil price to $10. Only now are they responding to last autumn's price peak. According to one survey, they intend to expand exploration and production by 20 per cent this year, a move that could be wrecked if the price continues to slide. But Opec has countries, not just companies, to run on oil, and therefore has every interest in price stability. So cutting back production this spring might be better than doing nothing. If such a move kept the oil price around $20, that would be a level that Opec, the international oil companies and the world's consumers could live with. _______________________________________________ Crashlist resources: http://website.lineone.net/~resource_base To change your options or unsubscribe go to: http://lists.wwpublish.com/mailman/listinfo/crashlist
