Oil price threat to global economy

THE world is on a two-week timetable to higher oil prices that could tip the US towards recession and pressure America’s central bank to cut interest rates earlier than its next scheduled decision at the end of January. Hawks among the world’s major oil producing nations are hardening their attitude in favour of production cuts to protect prices.

Dearer fuel last year has helped drive confidence among US consumers to its lowest level since December 1998 when there were fears of a global recession. Consumer spending drives two-thirds of the economy.

Backstairs diplomacy over the next fortnight will determine whether the Organisation of Petroleum Exporting Countries agrees production cuts at its extraordinary meeting on January 17.

Six of the 11 Opec states which collectively produce around 40% of the world’s oil have signalled support for cuts to head off a price crash in the second quarter when the northern hemisphere warms up.

The six are Iran, Libya, Venezuela, Indonesia, United Arab Emirates and Kuwait. Venezuela takes over the presidency of Opec tomorrow, but the position of Saudi Arabia, the largest producer, will be critical.

Oil prices have firmed in London and New York on lower US oil stocks and predictions of more icy weather. But forecasters say it will get milder again soon, and Iraq has resumed oil exports.

Brent crude oil for future delivery ended 2000 at $23.93, over $1 lower than it started the year and $11 below its peak of $35 in mid October.

Opec played ball with Western economies four times this year by raising production, and the price is causing concern in countries such as Venezuela, which derives 75% of export earnings from oil.

Higher oil prices would fuel Wall Street speculation that interest rates in the US will be cut sooner than January 31 when the Federal Open Markets Committee is next scheduled to meet.

The FOMC has switched from rate raising to cutting mood but failed to cut when it met before Christmas. Some US business organisations are urging it to act faster.

The consensus remains that the US economy will slow to a sustainable rate in 2001. But there is an increasing risk of either sluggish growth with rising unemployment or a recession with falling output and rapidly escalating jobless numbers.

Sir Eddie George, governor of the Bank of England, last week drew attention to the threat posed by uncertainty in the US.

George conceded that slowdown in America would affect the UK but said he was not expecting a "nightmare scenario" in 2001.

Focus: Page 17

Rob Stokes Associate, Business Editor Sunday, 31st December 2000 Scotland on Sunday

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-- Martin Thompson (mthom1927@aol.com), December 30, 2000

Answers

Sunday Dec 31 2000 | Updated 0031 hrs IST 1401 EST ---------------------------------------------------------------------- ---------- Opec could cut production to boost prices

CARACAS THE ORGANISATION of Petroleum Exporting Countries will cut production in January if needed to boost declining world oil prices, Venezuela's new oil minister said.

Alvaro Silva Calderon's comments came on Friday after President Hugo Chavez said he would stage another tour of Opec-member states if he felt it necessary in order to lobby for production cuts.

Under Opec's price band mechanism, production increases by 500,000 barrels a day if a cartel basket of seven crude oils exceeds $28 a barrel for 20 consecutive trading days. A price below $22 per barrel for 10 straight days triggers a 500,000 barrel per day cut.

On December 21, Opec's basket price fell to $21.64 per barrel, its lowest since April 11, triggering the 10-day clock.

"Opec's price band mechanism has functioned when we needed to increase oil output," Silva said in a televised interview on Friday. "It's possible that Opec's price band mechanism will function, if necessary, towards production cuts."

Silva said on Thursday he saw an Opec consensus to cut production at a ministers meeting in Vienna January 17. - PTI

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-- Martin Thompson (mthom1927@aol.com), December 30, 2000.