Financial Times Editorial: Time to open the taps

Published: September 10 2007 19:36 | Last updated: September 10 2007 19:36

The Roman emperor Tiberius liked to say that the secret of good government was that a ruler should shear his flock, not skin it. Operating a successful cartel is much the same.

On Tuesday the ministers of the Organisation of the Petroleum Exporting Countries – they prefer the term “producer group” to “cartel” – are meeting in Vienna to agree how much oil the 10 members subject to quota restrictions should produce. What they must decide is how much help to give a world economy battered by the financial turmoil of the past two months.

For some members, the lesson of history is that they should do nothing. Opec is haunted by the memory of the Jakarta meeting in November 1997, when production was raised sharply just as the Asian financial crisis broke, and the price of oil slumped to $12 a barrel.

The traditional “hawks”, including Iran and Venezuela, have been arguing that the world is well supplied with oil, and Opec need not provide any more.

Indonesia and Iraq, however, believe production does need to rise. Saudi Arabia, Opec’s most powerful member, is said to be watching the fall in US crude stocks, and to be concerned that the world will need more oil over the winter than Opec has officially forecast.

While the projections of demand are debatable, one number is giving an unambiguous signal: the price of oil. Having risen close to its record high last week, US crude was trading on Monday at about $76.25.

Expensive oil is a burden that the economies of consuming countries, wondering how hard the credit crunch will hit them, can ill afford.

If Opec leaves output unchanged on Tuesday, then oil could well go higher, sharpening the threat of a global downturn. If the ministers agree to pump more oil, it is quite likely the price will fall, but they should be prepared to accept that. Cheaper oil would be a shot in the arm that an ailing world economy badly needs.

It might seem quixotic for the US to hope for relief from Mahmoud Ahmadi-Nejad’s Iran and Hugo Chávez’s Venezuela. But those countries need to realise that a global recession would be in nobody’s interest. It would precipitate exactly the slump in oil demand that Opec fears. Ideally, Opec should agree to raise production, perhaps by 500,000 barrels a day. Failing that, the ministers should give the strongest possible commitment they will increase supply over the winter as demand grows. For the past few years, Opec has been happily fleecing oil consumers. Today, it needs to be sure that it is using the shears, not the butcher’s knife.

Copyright The Financial Times Limited 2007

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