Yet immediately the 11-country group closed the doors on its 135th conference in Isfahan, Iran, prices surged to new all-time record highs. Almost as the ink dried on their latest statement, it became out of date.

 

Opec had agreed in the meeting to ratify a production increase of 500,000 barrels per day (bpd) to take their collective output to 27.5mbpd.

 

This was only to make concrete the fact Opec members were already producing this much. The organisation's president had admitted that his members were quota-busting before the meeting to profit from high prices.

 

High price means overproduction

 

In a revelatory statement Opec President and Kuwaiti Oil Minister Shaikh Ahmad al-Fahd al-Sabah said last week: "I think that now everybody is overproducing.

 

"Current prices make it lucrative for everybody to hike production without the need for a decision."

 

Other oil ministers representing their countries at Opec agreed. "Member countries are already producing over their quotas," said the Algerian delegate Chakib Khalil.

 

Kuwaiti Energy Minister and Opec
President Shaikh Fahd al-Sabah

"We are raising the ceiling of production because we are already producing that amount," said Libya's Opec representative and Energy Minister Fati Hamid bin Shatwan.

 

So the meeting effectively approved production that was already happening. The result was the market shook with the realisation, previously reported by Aljazeera.net, that Opec is no longer able to determine the price of oil.

 

"Yes, it is no longer just the market saying Opec has no control over price, they are now saying it themselves," says Frederic Lasserre analyst at Societe Generale in Paris speaking to Aljazeera.net.

 

"When the Saudi minister says they cannot control pricing, you can see it. They have played their latest card, now they can't do anything else."

 

A year of high prices

 

Then, after the meeting, Opec released a statement saying it would look at a second 500,000bpd increase.

 

Algerian Oil Minister Chakib Khalil
(C) at the opening of the meeting

The meeting "authorised the Opec conference president to approve an additional increase of 500,000 barrels per day, (to 28mbpd) should oil prices remain at their current level, or increase further between now and the next meeting of the conference in Vienna scheduled for 7 June."

 

But by the time the statement had been circulated, prices had already ballooned to a record on the New York exchange hitting $56. Futures contracts for June swelled to $57.30. By the next morning, prices had reached new records of $57.03.

 

What made the statement by Opec more confusing was that the second potential increase of 500,000bpd would only be allowed "after due consultation with other heads of Opec delegation. Opec will continue to monitor the situation and respond to the needs of the market and to take appropriate and prompt action, as and when the need arises".

 

Yet at the same time, Shaikh al-Fahd al-Sabah seemed to say he thought 2005 was going to be a year of very high prices. As the meeting finished, he told reporters the third quarter of 2005 would "be at this level. Or like last October when it was at record levels. That is why we are trying to decrease prices now to stabilise the market."

 

Opposite effect

 

Unfortunately, what Opec thought would decrease prices and stabilise the market seemed to have the opposite effect.

 

"It is not very reassuring for the market to see the Saudis and Opec pumping at their full capacity," continues Lasserre. "What they are going to do in the third and fourth quarters of this year, when demand is expected to increase, no one can tell any longer.

 

"The market is worried that they will not be able to increase production later in the year and that we will be short of any spare capacity. If so, we will have major problems. The price will start flying."

 

While the market may be worried, many ordinary people are now asking how high does the price have to go to have a serious economic impact.

 

Impacts already

 

"There is already an impact," says Lasserre. "You can look at the US automotive market as an example, especially sales of SUVs.

 

"Consumers are turning to smaller engines, but that kind of impact will take some time, say two or three years, to change.

 

Some analysts say investment
is the problem, not peak oil

"If you are looking only at the short term, we would estimate the price would need to be somewhere in the $70 range in order to curtail demand; for example, from emerging economies cutting back on imports."

 

One thing Lasserre does not agree with is the growing band of analysts who are talking of a peak in global oil production, commonly known as peak oil.

 

"Sure, oil is a limited resource, so one day it will happen. But now we disagree that this theory has anything to do with current price rises.

 

"There is plenty of oil to be produced. Plenty of reserves. What we have now, is a bottleneck because of a lack of investment in the past.

 

"The capacity to produce oil is not enough. We need more wells, more refineries, more pipelines. This has very little to do with peak oil, we need a better infrastructure. It is an investment issue."

 

If so, then consumers around the world may soon be calling out for major new investments from producer nations and oil majors, as high prices start to bite.

 

Small production increases from Opec cannot satisfy the market, already looking at the third quarter of 2005 as a potential major problem. But how much producers are prepared to invest is yet to be seen.