OPEC Could Threaten Economic Recovery

An increase in oil prices to $25 a barrel poses little threat to the promising global recovery, but OPEC exporters could still spoil the party by holding back supply for too long, analysts and economists said on Tuesday. After six months of low prices that helped heal the ailing economy, industrialized countries now fear that a further escalation in energy costs will hurt corporate profits while steeper pump prices deprive consumers of disposable income. OPEC has indicated that they want to wait for prices to hit $30 before easing stringent supply curbs that have kept their economies afloat despite the downturn.

Qatar became the latest OPEC member to jump on the bandwagon saying on Tuesday that the cartel could release more oil with prices at $30, but OPEC leader Saudi Arabia has said it could act before prices got that high. Economists say the link between oil prices and economic activity is weaker than it was two decades ago, meaning only a prolonged period at higher prices would be sufficient to severely damage the fragile recovery.

International benchmark Brent crude oil stood at $25.17 per barrel on Tuesday, having jumped by a quarter in three weeks. The jump, largely attributed to concerns that the United States is preparing for a massive military attack on Iraq, has already hit consumers through higher pump prices and bigger heating bills. Brent at $25 equates to about $23 for OPEC's export price, which is still $5 below the price at which many members of the cartel would consider easing export curbs.

But $30 may be just where U.S. oil prices are headed if the OPEC keeps current limits past the end of June, analysts say. Last week the cartel decided to keep the reductions in place for the second quarter, and many members of the Middle East-dominated group are in no rush to reverse them. OPEC Secretary-General Ali Rodriguez said he saw no easing of the cuts, which shaved 20 percent of the cartel's output in 12 months, until next year due to a sluggish recovery in demand. Some in OPEC believe the world owes them a thank you note for allowing prices to languish below $20 for nearly six months. "I see no reason for OPEC to increase output in June if supply and demand is balanced," said Qatari Oil Minister Abdullah bin Hamad al-Attiyah on Tuesday. "But for sure if oil hits $30, we will increase," he added.