Oil production pledge aims to avert downturn

The Organisation of Petroleum Exporting Countries (Opec) has announced it is to increase oil output by eight per cent over the next month to tackle escalating prices.

As one of the world’s most actively traded commodities, oil has long been a factor in the global market, and its fluctuations have influence in other areas.

In the past, rising oil prices have precipitated economic downturn. A 21-year high of $42.45 per barrel was hit earlier in the week following the militant attacks in Saudi Arabia which left 22 people dead. As the price of oil soared over $40 in the US on Thursday, stock on the New York Stock Exchange fell in value.

Opec – which says its main aim is to achieve stable oil prices that are fair for both producer and consumer – hopes to increase the number of barrels of oil currently produced by an extra two million per day.

The current number of 26 million barrels accounts for a third to half of world oil production, but Opec is rapidly reaching its production capacity.

Opec has placed limits upon the amount of oil it produces in order to maintain a control over the price of oil. By increasing or limiting production levels, it effectively controls oil’s value.

Saudi Arabia, the country with the largest oil reserves, hopes the target cost of $22-28 a barrel can be met by an increase in the amount of oil pumped.

However, this overproduction may have little effect upon the amount of oil being produced, as Opec already produces 2.3 million extra barrels a day over their limits.

JP Morgan analyst Katherine Spector suggests that Thursday’s decision may serve only to legitimise overproduction which threatens to cause a divide amongst Opec.

The price of oil has already risen by some 25 per cent this year due to various pressures. The fear that Iraqi production will fail to meet expectations and increasing terror threats are some of the causes of this increase.

Others include the massive increase in demand of oil-using countries. The US burns around 24 millions barrels of oil per day, two-thirds of which goes on transport.

In Asia, China is the fastest growing user of crude oil. The amount of oil used by this rapidly expanding economy has risen by approximately 13 per cent per year.

This year, the increase has already hit 20 per cent.

Global investors have done little to help lower the process of oil with excessive speculation for profit causing prices to remain high.

Further pressure is being put on Opec to increase production by governments of oil-using nations who are all too aware of the increasing politicisation of petrol prices.

In the UK – where petrol prices have hit 80p a litre – there is an increasing discontent on the part of the public.

Although prices have not hit the high of June 2000, pressure is already being put upon the government to prevent prices rising further. Despite this, the planned 2p rise will go ahead September as set out by Gordon Brown in the budget.

This means that Tony Blair has joined many European nations in calling for an increase in production by Opec.

The move by Opec has been described by some as "cautious"; but countries hope that when they next meet on 21 July, the effects of Thursday’s decision will bear fruit with lower prices coming in across the global market.