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Outlook: Opec ogre doesn't scare us any more

AFTER A two-decade absence, the spectre of Opec is haunting the world economy once again. Ministers from the oil exporting companies meet in Vienna on Tuesday to ratify production cuts agreed last week. These amount to about 7 per cent of the annual output of signatories, and they come on top of a similar reduction in quotas last year.

For so long in the doldrums, the price of oil skedaddled up past $15 a barrel, and for a brief moment there were even smiles on all those long, sad, oil industry faces. Not for long, though. Already doubts have set in. In recent years, it has proved virtually impossible to hold producer countries to their quotas. The temptation to sneak more oil out of the ground than agreed is as strong as ever. Furthermore, because so little is known about the starting levels for production in many countries, it has proved easy to fiddle the figures.

In any case, the Indonesian, Venezuelan and Russian economies are in bad enough shape that they will be inclined to exploit any sign of a price rise by exporting more - thus pushing the price back down.

And apart from this inherent problem in making the cartel work, the economic fundamentals for quotas to work are not in place. Reducing supply will only raise the price in the face of sustained demand. With a quarter or more of the world in recession and the big consumers - the US, Europe and Japan - bound to slow down, stagnant and in recession respectively, the demand conditions for a price recovery are absent.

Oil price hikes are an integral part of the business cycle and often end up causing recessions, but they do not come about without prior economic recovery. Or, indeed, without war: all three of the big post-war jumps in prices have followed some form of violent conflict.

The oil industry may be right to insist that in the long term the outlook for the oil price is reasonably healthy. Oil prices have declined pretty steadily since Opec II in 1979, with a few spike ups in between, most recently during the Gulf War. Yet reserves are being steadily depleted. And at such low prices nobody is hunting out new reserves or developing them. Surely the price trend must turn around at some point?

Perhaps. But anybody tempted to predict a commodity shortage and consequent price rises ought to keep in mind Julian Simon's famous bet. In 1980 the economist bet Paul Ehrlich, a gloomy environmentalist, that the price of any five commodities he cared to choose would be lower in 1990. Mr Simon won. Scarcity drives human ingenuity.