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Wednesday, March 24, 1999 Published at 10:34 GMT

Business: The Economy

Opec slashes oil production

Oil producers finally agree to restrict output

Ministers from oil producing countries have agreed to cut global production by 7% to bolster depressed oil prices.

The members of the Organisation of Petroleum Exporting Countries (Opec) and others meeting in Vienna have agreed to a reduction in output of 2.1m barrels a day until April next year.

BBC News' Jeremy Frankel reports on yesterday's deal
Cuts among Opec nations will amount to 1.7m while non-Opec producers like Mexico, Norway, Russia and Oman have committed to additional cuts of almost 400,000 barrels a day.

The Libyan Oil Minister, Abdullah Salem al-Badri, said after the meeting: "Yes we have signed. We are happy, we have been asking for this for more than a year."

[ image: OPEC wants to reverse the glut of oil on the market]
OPEC wants to reverse the glut of oil on the market
Saudi Oil Minister Ali al-Naimi said the new restrictions were aimed at lifting oil prices back to $18 a barrel within a year.

"This particular decision was geared to reducing the surplus inventory and the fact that it is going to last a year guarantees elimination of any glut on the market," he said.

Supply glut, demand squeeze

Oil producing countries have been hurt as oil prices dropped to a 30-year low last year below $10 a barrel with a glut of crude oil flooding the market. Oil revenues were down 30%, or $50bn, for Opec countries in 1998.

Weak demand, especially in Asia after last year's financial crisis, has also been a factor.

The low prices have sharply cut the cash-flow of many oil-producing countries, damaging their debt-burdened economies. Sharp production cuts would drive up prices and revenue.

Policing a deal

The history of Opec has been a volatile one over the last thirty years with members finding it hard to strike agreements and stick to them for their collective benefit.

The problem for the cartel has always been how to police any deal to cut oil production to prevent cheating by its more economically vulnerable members.

Last year's planned 3m bpd production cut was believed to be widely ignored, especially by Latin American and African producers faced with a worsening economic crisis.

But this time Opec says there will be no slackers.

"There are no fears this time about compliance. Every country is willing to comply fully. They have seen the consequences when they do otherwise," said a Gulf state official.

Analysts sceptical

Industry analysts are more sceptical. "OPEC has got some credibility back. Now it's up to them to follow it through," said Bob Finch, head oil trader at Vitol SA.

Mehdi Varzi of finance house Dresdner Kleinwort Benson agreed: "The key to the success of this agreement is its sticking power. If they get 75% compliance it is very good news for (higher) oil prices."

Inflation fears

However, this would hit consumers hard, perhaps rekindling inflation.

Roger Bootle, economist: Oil isn't as important as it used to be
The oil price has increased 30% in the last month on the belief that Opec would finally agree to cap output. Oil has risen from its low in December of below $10 a barrel, for Brent crude for May delivery, to $13.75 as the decision was announced.

City traders believe that any sustained increase in oil, the most important traded commodity, will put a damper on hopes for a subdued inflation outlook. Others say the potential inflation effects have been overstated.

"Oil prices have firmed up and that could take a further toll on the US bond market. Some people have put low inflation down solely to cheap energy prices," said Gerard Lyons of DKB International.

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