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Wednesday, September 22, 1999 Published at 18:00 GMT 19:00 UK

Business: The Economy

Slick strategy fuels inflation fears

Opec curbs on production have been flouted by some countries

Drivers will face soaring petrol prices and homes and businesses will face bigger heating bills if noises coming from Vienna are to be believed.

Ministers from the 11 oil-producing nations are holding a two-day meeting, at which they are expected to agree to continue to keep oil prices artificially high.

[ image:  ]
They are reacting to the record low price reached at the end of last year and the beginning of this, when Asia fell into recession and no-one made money from one of the world's most precious commodities. Many firms are still feeling the effects.

Exxon and Mobil joined forces to create the world's biggest oil company. UK giant BP merged with US rival Amoco, and TotalFina this month announced a merger with Elf.

Shell, meanwhile, is undergoing a huge restructure, involving the disposal of four of its five head offices, to reduce costs.

Exploration budgets were slashed and all but the cheapest of new schemes to extract oil were shelved.

In March, huge production cuts were agreed by the Organisation of Petroleum Exporting Countries. It was something of a gamble, given that Opec's record on controlling production is none too solid.

Opec - the governing body of the oil industry - has not always enjoyed the success it would have liked in controlling oil prices.

Quota cheating

Opec produces more than 26 million barrels of crude each day, at least 35% of the of the world's total.

Member nations are Saudi Arabia, Iran, Iraq, Venezuela, the United Arab Emirates, Kuwait, Qatar, Nigeria, Libya, Algeria and Indonesia.

But its efforts to cut production have sometimes been undermined by non-Opec countries taking advantage of the high prices to meet world demand or by Opec members themselves cheating on quotas.

Venezuela and Iran have been considered the main culprits in flouting the restrictions.

[ image: The UK could seek to soak up demand if prices stay high]
The UK could seek to soak up demand if prices stay high
Still, the cuts had to be made and half-way through the year-long strategy plan, Opec ministers are meeting for a review.

This time, their drastic production cuts have paid off - partly because non-Opec members joined in the curbs.

Together with countries such as Russia and Mexico, production was cut by 2.1 million barrels a day - 2.6% of the world supply.

The price has soared since. From a low of about $10 a barrel at the start of the year, it now stands at more than $23 - its highest level for nearly three years.

Many dealers now expect crude prices to reach $25 - which would appear to be good news for Opec.

And few member countries are in a position to be able to increase their output.

At the same time, Asia is expected to see demand pick-up as the region recovers from its recession.

[ image: The price of oil has soared since production was cut]
The price of oil has soared since production was cut
But the prospect of a sustained period of high oil prices is fuelling fears that inflation could take off in the West.

Almost certainly, Opec's expected decision will jack petrol prices higher.

Some experts also fear that the production curbs could actually be counter-productive: if oil prices remain high for too long, demand will eventually drop, so prices will have to come down again.

But for the time being, Opec members are congratulating themselves on their success.

The road won't all be easy for the organisation, however. Non-members such as the UK may seek to take advantage of the continuing high prices.

A new drive was launched a fortnight ago to make the North Sea oil industry more competitive.

Energy Minister Helen Liddell said: "Since oil prices fell last year, the international industry has changed and Britain's industry must change with it."

Part of the action plan is a target of increasing the UK's share of the market by 50%.

Opec may be delighted with its new-found success, but it cannot afford to let its guard slip.

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