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The Money Programme Saturday, 25 March, 2000, 10:44 GMT
More 26/3/99

OVER A BARREL

Could the current price of oil, which has trebled in the past year, drive western economies into recession ?
Sheikh Yamani, former Saudi Arabian Minister for Petroleum and now chairman of the Centre for Global Energy Studies, tells The Money Programme that OPEC seems set to do little to increase production, and thereby ease prices.
"Some of them, (OPEC members) say it's only 1.5 million barrels a day to be increased. Taking into consideration the lack of compliance, means that they increase only by 300-400,000 barrels a day. That's peanuts in my opinion"
He considers such a small increase will do little to bring down the oil price. Yamani argues that it's in OPEC's interest they members should increase production to the point where it will bring prices back to $20 a barrel, but he doubts whether they share his view. "Unfortunately OPEC has a very short memory and therefore they make mistakes all the time. They force the price to go way up"
Yamani continues: "The effect is much more production in the non-OPEC countries which means that OPEC will find itself a few years from now in a situation where they have to further reduce their production and that is very serious for them"

Production levels, and therefore prices, are due to be set by OPEC members when they meet on March 27. According to the programme there's a wide variety of views among the oil producers. Algeria sees no need for an increase in production at this stage. Saudi Arabia, on the other hand, has said "we recognise there is a need for additional production". Mexico is also thought to favour an increase. Its energy minister says: "It is clear that one of our national interests is to have a healthy, dynamic world economy."

But if prices do stay high, what effect will that have on inflation and interest rates?
The National Institute for Economic and Social Research has a computer model of the new British economy. The Money Programme asked senior research fellow Nigel Pain to examine what would happen if OPEC did hold production down, and the oil price stayed around $30 for the next year.
Nigel Pain said: "It would add around about a quarter of a percentage point to the overall level of inflation by the end of the year. Accompanying that higher level of inflation we would expect to see short term interest rates go up with the Federal Reserve and the Bank of England raising interest rates by about a quarter of a percentage point."

High oil prices could have an effect on growth too.
The Money Programme asked 12 leading economists what impact they thought a continuing $30 price would have on UK growth. Two said growth wouldn't be affected. One predicted a slight improvement. But nine said growth would be reduced - most in the range of a quarter to one per cent. The most pessimistic was for a fall of 3.5% - enough to plunge Britain into recession.

The impact on the United States, too, could be severe.
Joseph Carson, US chief economist at Warburg's in New York, tells the programme: "You just have to look back at the last thirty years, every major inflation cycle always started with a big jump in the price of oil"
He continues: "It spills over to shipping and production costs, spills over to maybe wage negotiations and then inflation expectations of the economy"
Carson believes that low oil prices have played an important part in creating the conditions for the long-running Wall Street boom, and that the price hike could play a part in bringing it to an end. And that could be the most serious consequence of all.

Links to more The Money Programme stories are at the foot of the page.


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