Opec's cut fails to stem oil price slide

Opec shocked the market when it said last week it would cut production levels.

Chakib Khelil, president of Opec and Algeria's energy minister, at the Vienna conference last week.

It is accepted wisdom that Saudi Arabia, the world's oil superpower, always gets its way in Opec. But in Vienna last week, the opposite held true. Or so it seemed. When ministers emerged from their policy meeting at three o'clock on Wednesday morning, Chakib Khelil, Opec's president, shocked journalists and analysts waiting in the secretariat building with an announcement that the group would cut production.

At a time when oil prices had only just fallen back to $100 a barrel, from a high of $147 in July, Opec appeared to be defending a price that still looked exhorbitant to consumers and poisonous for the world economy. Ministers from countries that were already struggling to keep up with their production quotas, such as Venezuela and Nigeria, rallied behind an agreement that would see the group return to supply limits agreed last year, but which had been ignored as prices unexpectedly surged into three digits.

If the agreement were to be implemented to the letter, Saudi Arabia would be almost the only country required to cut output, because many members were not even pumping as much as they were allowed under their quotas. Unfortunately for Opec's price hawks such as Venezuela and Iran, Saudi Arabia has taken an independent line on oil policy since prices exploded earlier this year. The kingdom is far more concerned about the damaging effect of high energy costs on world economic growth than keeping oil prices as high as possible for as long as possible.

Only three months ago, King Abdullah of Saudi Arabia hosted a summit in Jeddah outside the ambit of Opec to announce a substantial increase in production to 9.7 million barrels a day. "We have worked very hard since June's meeting to bring prices to where they are now," said Saudi Arabia's oil minister, Ali al Naimi, as prices subsided to $100 before last week's meeting. "We have been very successful."

After Mr Khelil announced Opec's cut, Mr Naimi was careful not to contradict his colleagues in public, leaving town without saying another word. But his aides held unofficial briefings in which they made clear that the kingdom's policy of meeting demand, irrespective of quotas, had not changed. This year's oil shock has been one of the main culprits for the curse of inflation, which has prevented central banks from cutting interest rates as much as they would have liked to stimulate growth.

Without growth in the global economy, Saudi Arabia and other nations investing in new production capacity will be left with billions of dollars worth of new oil facilities without the prospect of any buyers. They will also find a dearth of foreign investors in their fast-growing non-oil sectors, from finance to manufacturing and services. As oil prices slid after the meeting, even Mr Khelil said Opec's decision had proven "ineffective".

If and when demand for its oil wanes, Saudi Arabia will not willfully create a glut on world markets and exports will probably decline early next year after the northern hemisphere's winter. But Opec is far from united over how to tigthen output policy as the world economy slows. Venezuela never agreed to the quota it was assigned last year, reflecting a dramatic drop in capacity after a decade of underinvestment by President Hugo Chavez.

And Riyadh is unlikely to give up gains in market share that have cost billions of dollars in new investment. All this indicates that prices have further to fall. Saudi Arabia's plans to diversify the economy require oil to be no higher than about $70 a barrel, and the UAE's threshold is a long way below that. Below $70 a barrel many other producers start to feel the pinch, not least producers of biofuels which now constitute about 1.5 per cent of global liquid fuel supply, followed closely by producers of oil from Canadian tar sands.

So when Opec ministers emerge from a meeting at three in the morning, throw up a bunch of numbers and then climb on a plane without much explanation, it's normally time to sell futures if you are an oil trader, or expect a cheaper tank of petrol if you own a car. Because that is what Opec wants to happen, even if it has trouble telling you. [e-mail]