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Wednesday, August 25, 1999 Published at 16:12 GMT 17:12 UK

Business: The Economy

Why we should worry about oil

Opec's production cuts have driven up prices

In February this year, oil prices were as low as $9 a barrel, but prices are now at more than $20 and rising fast. The BBC's Rodney Smith examines whether we are on the verge of a new oil price shock.

[ image: Rodney Smith]
Rodney Smith
More than 25 years ago, the oil producers who then made up the Organisation of Oil Exporting Countries (Opec), held the world to ransom and at great cost.

Oil prices rose four-fold over three months in early 1974. Street fuel prices surged, as oil companies rushed to pass the cost on to consumers.

Oil-fired power stations went on to short-time working, oil traders were reputed to be holding loaded tankers offshore in anticipation of further price rises, speculators would buy and sell real and imaginary oil cargoes still in mid-ocean as the adventurous and the unscrupulous cashed in on disaster.

Coping with the shock

As these crippling prices became established, large American car manufacturers, desperate to supplement their fleets of gas-guzzlers with smaller cheaper cars, rushed out some ridiculous models; like the cut in half Valiant from Chrysler, and American Motors relic from a 1950s sci-fi film set, the nightmarish AMC Pacer, a broad inverted soup bowl of a car now much prized by collectors with a sense of humour.

It also brought about the death of the petrol engine in London's black cabs; cheaper diesels replaced them. Back street garages sprang up everywhere to perform swift engine transplants.

Share impact

World stock prices plummeted.

The popular predecessor to London's Footsie 100 share index, the 30-Share Index, fell to laughable levels and blue chip shares could be had for beer money in today's terms. Stockbrokers could almost give away shares in stalwarts of the economy like ICI, which deal heavily in plastics, oil and energy.

[ image: Rising oil prices are filling the coffers of Opec's cash-strapped states]
Rising oil prices are filling the coffers of Opec's cash-strapped states
Could this happen again? Probably not. World oil prices are above $20 a barrel after spending much of last year and early this year well below that.

They could go even higher, says Leo Drollus of the London energy think tank, the Centre for Global Energy Studies. He's looking for $25 or more.

But his organisation was established by Sheikh Yamani, the strongman Saudi oil minister behind the oil price increases of the 1970s, so the CGES tends to offer solutions to Opec members rather than oil companies or consumers.

Consumer threat

Mr Drollus is not concerned that consumers will be hit, but by the prospect that high oil prices could persuade non-Opec producers to increase production, to cash in on a bonanza.

But if the oil price does rise another, say, $10 a barrel to $30, we'd be seeing some significant changes around here.

The cost of petrol, and all other forms of energy, would rise. Food would become more expensive to grow, to process and to package. Everyday things would cost more, from cars and computers to the pen in your hand and the phone in your pocket.

The inflation we thought we had conquered would return with a vengeance, and all the monetary policy in the world would have negligible impact on the one things central bankers do not control: the price of our single most useful raw material, oil, and its associate, energy.

Why oil is back on the agenda

What has happened is the convergence of three economic influences. After twice failing to cut output twice last year, Opec tried again in March.

[ image: Production cuts have coincided with rising demand in Europe and Asia]
Production cuts have coincided with rising demand in Europe and Asia
Members agreed to reduce production by 1.7m barrels a day, that is 3%. This time it seems to have worked.

It has been helped by a coincidental fall in world oil stocks. This is partly a result of the third influence, the emergence from recession of the economies of Europe and East Asia. In short, demand was growing just as the Opec producers were aiming to reduce output.

Oil prices have risen almost unhindered since March, and with no change in the fundamental reasons for prices to rise, this could continue for a while yet. Most experts in the field agree with CGES that $25 would be the likely present ceiling.

At the height of Opec's powers, it had 13 members; Gabon and Ecuador have quit, but there were far fewer oil producers than there are today.

A modern Opec, seen to be acting successfully in the best interests of its members, might swiftly attract new members.

Opec producers control the biggest and most easily exploited oil reserves in the world. Russia and Kazakhstan are believed to be close behind.

A return to 1974?

If the energy consuming world continues to use oil as freely as it has since the last oil crisis died away, and Opec lost its grip, there will sooner or later be another reckoning.

In 1974, the Arab members of Opec were looking for revenge on a Western world which had backed Israel in the Yom Kippur War of October 1973.

They used oil, and they turned the screw fiercely for the rest of the decade. There was some justice in what they did. The major oil companies had come to dominate the oil world, and made all the profits. Opec wanted some of that, and got it.

But Opec was made up not of experienced world statesmen, but leaders with fairly parochial views of the needs of their own communities.

And Opec did upset the balance of the world economy, and showed little mercy or remorse until it lost control again, partly from competition from newcomers, partly from infighting among members and loss of cohesion.

What should be worrying global economic planners is the thought that attitudes would not necessarily be very different if OPEC again found itself in a position of huge power.

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