Thursday, 11 January, 2001, 18:02 GMT Oil price 'set to surge'

Sheikh Ahmed Zaki Yamani, the former Saudi oil minister, says that Opec has already decided to cut production, ahead of its official meeting next week. Sheikh Yamani is considered to be the architect of Opec's price cartel.

http://news.bbc.co.uk/hi/english/business/newsid_1112000/1112254.stm

The Sheikh told the Royal Institute of International Affairs in London on Thursday that the 11 country cartel would agree to reduce its oil production by 1.5m barrels per day, in an attempt to push prices higher.

The Kingdom of Saudi Arabia has already informed its customers that it will cut its production by 500,000 barrels per day, added the Sheikh, who was once accused of holding the world to ransom.

And these cuts will coincide with a shortage of Iraqi oil, creating a price spike in the second half of January, he said.

The price of oil has been on a rollercoaster all year, recovering from a low of $10 a barrel in 1999 to soar above $35 in the summer of 2000.

It now stands at about $25 a barrel.

The combination of Opec cuts and the Iraqi situation will definitely create a shortage in supply, and prices will definitely go up. Sheikh Yamani, Former Saudi Oil Minister And the Sheikh warned that the international oil markets would feel the full force of the Iraqi oil export suspension during January, the month when the tankers would have reached their respective destinations.

Iraq had asked oil trading companies to pay money directly into Saddam Hussein's coffers, but the UN intervened, temporarily stalling exports.

It was price rises such as the one now predicted for late January that caused soaring petrol pump prices and fuel protests in Europe and elsewhere in September.

Some Opec member countries may haggle for an even steeper cut of 2 million barrels per day.

But the Sheikh also stressed that the long-term outlook for the oil producers is "disturbing".

Ali Naimi has succeeded the Sheikh as Saudi oil minister The change in prices will come about due to a change in the balance of what the Sheikh calls " the holy triangle of supply, demand and price".

Supply will rise, especially from non-Opec producers such as Kazakhstan, Brazil and West Africa.

And better drilling technology will help more oil to be produced more efficiently across the world.

The rise in supply will coincide with a slump in demand, inevitably leading to a price collapse.

The Far East is the only key area of the world which is actively increasing its use of oil.

Bu the effects of a slowdown in the US economy will have a knock-on effect on the oil-appetite of these countries.

And in the West, car manufacturers are pushing ahead with new technologies such as hybrid-electric and fuel cell cars in order to find an alternative for petrol.

The popularity of gas as an alternative to heating oil or fuel oil is also a fast growing trend of the West.

Don't discount politics

But despite the Sheikh's confident predictions, the political situation in the Middle East remains a hugely important, and yet unknown, factor.

Oil will still be a major fuel for sometime yet, but the price of oil will drop dramatically. Sheikh Yamani, Former Saudi Oil Minister

Some of the biggest movements in the oil price came about because of unexpected political action, such as the Gulf War, Iran's Revolution and the Iran-Iraq war.

Even the best of forecasts can be radically turned around because of events such as these.

The Sheikh was the oil Minister of Saudi Arabia between 1962 and 1986 and was well known as a price hawk.

He is now chairman of the UK-based Centre for Global Energy Studies.

-- Martin Thompson (mthom1927@aol.com), January 11, 2001