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Last Updated: Thursday, 1 April, 2004, 12:38 GMT 13:38 UK
Opec's struggle to keep oil prices high
By Andrew Walker
BBC World Service economics correspondent in Vienna

An oil worker at the Shuaiba refinery near Basra
Will Opec members obey its own rules and turn off the taps?

So the oil producers' cartel Opec confirmed plans, originally agreed in February, to cut oil supplies with effect from 1 April.

But it is another matter whether they will actually make the full cut they announced.

The group's members do have a long record of failing to abide by their own decisions.

But the intention set out by the decision at Opec headquarters here in Vienna is clear enough: To keep prices around their current, rather high, levels.

Moving target?

Now how does that fit in with Opec's professed target for the price of its own benchmark crude oil - called the Opec basket - of $22 to $28 a barrel?

The Opec basket is usually a dollar or two cheaper than North Sea Brent, a widely-used international benchmark.

But crude oil prices have been higher for several months - they are so now - and the output cut decision seems calculated to keep it that way.

Some observers think the target no longer really applies.

But Opec members deny that is the case. The target is the same they say.

Weak dollar

When I asked the United Arab Emirates' petroleum minister Obaid al-Nasseri whether there is a new target price, he laughed briefly and said: "No, there is no new target, our target is still as it is."

But he added: "No producer would like to see the price go down, that is clear."

And he went on to spell out one reason why Opec members welcome current price levels.

"The purchasing power of our revenue is down by 20% or 30% even."

That has happened because the dollar has declined over the last three years or so, and oil is priced in the US currency.

Economic growth

A weak dollar is a universal concern among Opec members.

And there is a debate about whether the dollar really is the best currency to use for the oil trade.

Man filling car at petrol station
High energy prices have not held back spending
There has been a lot of talk, and some work going on in the Opec secretariat, about whether to change, perhaps to some basket of currencies.

But the willingness to accept a price well above the target range is probably not just about the decline of the dollar.

They really rather like it.

Perhaps they feel there's more chance now that they can in a sense "get away with it" - that the price can be sustained without doing damage to their customers, the oil importing economies they have to sell their output to.

The global economy is now stronger than it has been for three of four years.

Not key

Certainly one of the key reasons for the current price of crude oil is reasonably strong economic growth in two very large economies - the US and China - that have been sucking in vast amounts of Opec oil.

And one area where economic performance is disappointing - continental Western Europe - has been sheltered from the rising oil price by the dollar's decline against the euro.

Opec certainly insists that the oil price is not the key to global economic performance.

UAE Minister Obaid al Nasseri says growth is stronger now than in 2002 despite the higher oil price.

Agreed cut

Saudi Arabia is the big power in Opec.

It is by far the group's largest producer and has much larger known reserves than any other country.

The Saudi attitude to prices has evolved in an important way in the last few years.

A couple of years ago, the Petroleum Minister Ali al-Naimi was seen as a "price dove"; as being prepared to live with a relatively moderate oil price.

He always said that $25 a barrel for the Opec basket was about right - the middle of the group's official target range.

And yet, he came to Vienna an enthusiastic advocate of going ahead with the previously agreed output cut, even though prices are already well above the target.

Saudi expenses

Now, it is true that without the cut there would be some pressure downward pressure on prices.

Opec headquarters
Opec believes speculators are to blame for high oil prices
There will be less demand for heating oil at this time of year and there might be a problem with speculators driving prices lower.

Opec members routinely blame speculators, but this time analysts say they have something of a point.

But even allowing for all that, the Saudi position does seem to have changed.

Leo Drollas of the Centre for Global Energy Studies says the Saudis are no longer price doves.

The reason, he says, is that the government is spending more at home and needs a minimum price of around $30 a barrel for its spending plans this year.

He says they have to keep many constituencies, or interest groups, happy - the Royal Family, the middle classes and the religious establishment - and at the same time prevent fundamentalists doing real damage.

So there is a lot of spending on social welfare, hospitals, education and "to keep the security services on the tail of the terrorists".

Doing all that requires a lot of revenue from Saudi oil and that means a relatively high price.

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