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Last Updated: Thursday, 3 June, 2004, 17:59 GMT 18:59 UK
Oil prices drop after Opec deal
Saudi oil minister Ali Naimi (left) and other Opec officials
The deal was struck at a meeting in Beirut
The decision by the oil producers' cartel Opec to raise output has had the desired effect of cooling high oil prices.

The group of mainly Middle Eastern producers will raise output quotas by 2 million barrels a day from 1 July and a further 500,000 b/d from 1 August.

The deal falls short of what some oil consuming countries were hoping for.

But the price of a barrel of US-traded oil dropped by 68 cents to $39.28 as news of the agreement emerged.

In London, Brent crude fell 46 cents to $36.40 a barrel.

Raising the target

Opec's decision was welcomed by Chancellor Gordon Brown, but he said he would be pressing for an even greater increase.

"We will press Opec both on meeting the production target and on the case for raising the target higher," Mr Brown said in a statement.

Responding to concerned motorists, Mr Brown said he was leaving open the possibility of scrapping his proposed increase in fuel duty in September.

"Once I see the progress that is being made by Opec in raising production and getting the oil price under control I'll review the situation in August," he said.

US Treasury Secretary John Snow, meanwhile, also welcomed the production increase, calling it "encouraging".

Price pressures

Oil analysts remain doubtful that Opec's agreement to lift output can have a deep and lasting effect on prices.

Click to find out who has oil, who uses it and how much it costs

The attack by militants on an oil workers' compound on Saturday in the Saudi city of Khobar, which left 22 people dead, pushed prices to record highs of $42.45 a barrel early in the week.

Opec members say security fears and the action of market speculators are to blame for soaring prices rather than short supplies.

Meanwhile, industry analysts agree that Opec states are already pumping oil flat out, with members breaching existing ceilings on production quotas, suggesting the impact of any Opec decision to raise output targets could be limited.

Sending a signal

Saudi oil minister Ali al-Naimi has said Opec should strive to stabilise oil prices within its official target range of $22-$28 a barrel.

US-traded crude reached $42.45 a barrel
Terror attacks created fears of disruption of supplies from Saudi Arabia
Saudi Arabia is world's biggest oil producer with output of about 9 million barrels a day
Opec total output is about 26 million barrels a day - about a third of the world total

"Today's prices have nothing to do with the fundamentals of the oil market," he said on Wednesday.

"Increasing production will not necessarily solve the problem, but we need to reverse the perception (of shortages), and this is what we will work for."

Tight market

But the impact may be slight since quotas are widely flouted.

"Most of the quota increase will effectively legitimise overproduction as opposed to adding physical barrels to the market," said JP Morgan analyst Katherine Spector.

Although the price rises have brought Opec members welcome revenue, there is concern at the long-term effects on sales, BBC economics correspondent Andrew Walker said.

chart showing oil production of Opec member states

While there seems to be no immediate danger of a global recession, sharp oil price rises have caused economic downturns in the past.

Opec members are also under pressure from oil-using nations, where the cost of petrol is increasingly becoming a heated political issue.

Even before the latest Saudi terror attack, world oil prices had risen by about 25% since the end of last year because of soaring demand in the US and China, the action of speculators, supply bottlenecks at US refineries and fears that the Iraqi conflict could disrupt supplies.

However, economists point out that even at its current price, oil remains cheaper than it was in the late 1970s once the effects of inflation are stripped out.

A spokesman for environmental group Friends of the Earth described the decision to raise oil production as a "short-term sticking plaster".

He said: "Our economy is still under threat from oil industry volatility and our climate is being seriously damaged by burning oil."

The BBC's Rory Cellan-Jones
"Amid some chaos, OPEC unveiled a bit of a fudge"

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