Opec and the soaring cost of oil

Why blame things on Opec?
Because it has 'form' (see below). The Organisation of the Petroleum Exporting Countries - a 13-state body dominated by Saudi Arabia and the Middle Eastern nations - was created with the express purpose of influencing prices. And in the early Seventies it did, indeed, hold the world to ransom by restricting supply. The US and Britain maintain that the cartel is once again driving
up prices by limiting production, even though Opec now only controls 40 per cent of the world oil market, compared with 70 per cent in 1973.

What does Opec say in its defence?
Opec's members claim that most of them couldn't supply more even if they wanted to: they are already pumping at or near capacity. Only Saudi Arabia has substantial surplus capacity; yet when, at George Bush's behest, the Saudis did agree to produce 300,000 extra barrels per day (bpd), prices were barely affected. In any case, Opec insists it's not in its own interest to let the oil price rip.

Why wouldn't Opec want to push for higher prices?
Because the price rises it engineered in the Seventies led to a global recession, a slump in demand and a drive by other countries to find new sources of supply - in the North Sea, Russia, the Gulf of Mexico and elsewhere. This was disastrous for most of the cartel's oil-rich states, which are rich in very little else. So since then, Opec has aimed for long-term price stability: in 2000, it adopted a price policy of cutting production if it went below $22 and raising it if
it crested $28. However, after 9/11 and the Iraq invasion, prices skyrocketed; so Opec has now abandoned official price targets.

What, then, is behind the recent price explosion?
Opec points to the US Federal Reserve which, to prop up the domestic banking industry, has slashed interest rates and expanded the money supply, in the process severely weakening the dollar. As oil is bought in dollars, it now takes a lot more dollars to buy a barrel of oil. And this problem has been exacerbated, says Opec, by speculators. When economies slow, investors tend to move into commodities - food, gold, oil; their prices have recently reached record highs. Anticipating yet further price increases - a Goldman Sachs report speculates that oil prices