All eyes on the Saudis with oil at 10-year high

The eyes of the global oil markets will be on Crown Prince Abdullah of Saudi Arabia when he takes the rostrum at the United Nations millennium summit in New York today. Dealers will be scrutinising every word to see whether the world's biggest producer is prepared to open the taps and pump enough oil to bring down the price of a barrel of crude, which is running at more than $32 (€36.05) - the highest level since Iraq invaded Kuwait 10 years ago.

With dearer fuel pushing up inflation in Europe and casting a shadow over the US presidential elections, the West is hoping that the Saudis will turn up at next week's meeting of the Organisation of Petroleum Exporting Countries (OPEC) in Vienna with a plan that will persuade the more hawkish members of the 11-nation cartel to join an agreement that would allow higher production.

The US has been putting most of the pressure on OPEC to raise production but the European Union is concerned enough to float the idea of a world competition authority which would bust the cartel apart.

The signs that OPEC will relent and raise production are not good. Although the Saudi oil sheiks have always been a moderating influence in OPEC - even during the two oil shocks of the 1970s - they are reluctant to be seen as poodles of the US.

Meanwhile, the president of OPEC, the Venezuelan Energy Minister, Mr Ali Rodriguez, has been touring the world's oil producing countries pushing the case for keeping prices at current levels. In a world that is witnessing an ever bigger gulf between rich and poor, Venezuela's president, Hugo Chavez, said last month: "We don't want prices to drop below their present level. Lower prices would be like passing a death sentence on ourselves and our people."

In the wealthy countries that make up the Organisation for Economic Co-operation and Development, fuel duties account for 60 per cent of the pump price while crude oil accounts for just 12 per cent. Environmentalists, who support higher duties, point out that very little of the revenue raised from fuel duties has found its way into investment in the development of new and clean energy.

The economic reasons for rising oil prices are simple. Global demand has picked up since the devaluation in Brazil in early 1999 marked the end of the financial crisis that started in Thailand 18 months earlier. America has defied the gloomy pundits, European growth has been robust and even Japan has shown some signs of emerging from its 10-year period in the doldrums. At the same time, OPEC - while by no means the force it was when it brought an end to the long post-war boom with a fivefold increase in oil prices in 1973 - was forced by the dramatic slide in the cost of crude to less than $10 a barrel to stitch together a deal limiting supply. It has chosen its moment well, with stocks in the US at historically low levels. Stronger demand plus restricted supply equal higher prices.

The question is: how high can they go? Insiders say talk of prices hitting $40 or even $50 a barrel over the next few months is alarmist, and that any efforts by OPEC to hurt the West would be self-defeating, triggering a recession that would lead to another collapse in oil prices.

The Saudis are warning their fellow cartel members that higher prices only encourage non-OPEC members to explore for new reserves which reduce prices, and OPEC's market share. Should the more militant members of OPEC try to force Saudi Arabia into adopting a more aggressive stance, there would be a real prospect of the cartel breaking up.

The world has changed since 1973 and the West is much less dependent on oil than it was a quarter of a century ago. There are some economists who believe that higher oil prices are just what the doctor ordered, because they will provide the sort of check on the booming US economy that has not been forthcoming from Mr Alan Greenspan at the Federal Reserve. But as the price creeps up, nerves in Frankfurt, Tokyo and Washington have started to jangle. For some policymakers, it all seems worryingly familiar.