US and EU warn Opec

Opec limits the amount of oil drilled by members

Both the American and European authorities have expressed their concern that recent moves to cut global oil output could lead to a surge in energy prices.

A European Commission spokesman said that a fair price for oil should be closer to $20 a barrel than $30, and that a planned supply cut by the Opec producers' cartel maintained an "unstable" price situation.

The US Energy Secretary Spencer Abraham has also said that oil prices will be monitored "very closely" over the next few weeks.

On Wednesday, the world's leading oil producers agreed to take emergency action to push oil prices higher.

The European Community considers that a right, fair and real price for [oil] should be closer to $20 than to $30

Gilles Gantelet, European Commission

President George Bush and Mr Spencer expressed immediate concern and indicated that the US is willing to break into emergency stock reserves in order to avoid a price spike.

In its third cut so far this year, the Opec cartel will reduce output by one million barrels a day from the beginning of September.

The 11-member cartel controls the amount of oil that flows into the market in order to keep prices at the levels it wants.

By cutting production and limiting supply, Opec hopes to prop up the falling price of crude oil in the international markets.

This will also have a knock-on effect on petrol prices at pumps throughout the world, increasing consumer discontent.

US concern

And energy price inflation could harm many of the world's industrialised powers which are already battling against an economic slowdown.

The US economy is bumping along right now and a run-up in energy prices would hurt

President George Bush

US President George Bush expressed concern about Opec's decision:

"The US economy is bumping along right now and a run-up in energy prices would hurt."

"It's very important to have stability in the marketplace," added Mr Bush, reflecting a view that Opec itself holds.

European spokesman Gilles Gantelet said the Commission could understand the arguments used by producers, but regretted the lack of consultation between producers and consumers on the cut.

"It's maintaining a situation of non-stability of prices... we think that one of the key issues is stability of the price."

Emergency mechanism

The cartel normally agrees cuts during its official meetings in Vienna, but has chosen to take emergency action because of the weakness of the oil price.

High crude prices feed through to petrol prices at the pump

Opec has created a mechanism to artificially control the price of a basket of seven crude oils and keep it within a desired range of $22-28 a barrel.

The price of this selection of crude oils was at $23.5 on Wednesday, a price that some member countries feel is too low.

The one million cut comes on top of previous cuts of 2.5 million barrels a day, meaning that total output is now 13% lower than last year.

But weaker demand for oil and petrol around the world has kept the crude price well below last year's highs of $35 a barrel.

Oil already rising

The action of Opec has succeeded in preventing the oil price falling to the lows of about $10 a barrel seen in 1999.

In London, the benchmark Brent crude oil stood 53 cents firmer at $25.43 a barrel at the close of trade.

On the New York energy exchange, Nymex, September oil futures rose 62 cents to $26.93 a barrel.

In early trade in Asia on Thursday, prices continued to rise, but some traders said some of the upward momentum had been lost.

Excluding Iraq, the member nations of the cartel together account for 40% of the world's crude oil production.