Reasons to be optimistic about oil prices

This year the Opec countries have been blessed with good fortune in their efforts to control the world's oil price.

First, oil prices skyrocketed upwards in the run up to the war in Iraq. Then a huge release of oil supplies, largely by Saudi Arabia, headed off the threat of emergency stockpile releases during the war itself. Thus post-war oil prices are not around $10, as after the 1991 Gulf War, but above $25.

The question now is can it stay like this? The short answer seems to be, not without the elimination of all over production at this week's Opec summit. That should be an easy call as with the war in Iraq now over the reason for over production is gone.

Thereafter the outlook for the oil price and oil production depends on the recovery of the world economy from its present slump, and continued economic growth in China, increasingly the energy customer of the future for the Middle East,

China is not much of a worry, despite the SARS virus and its impact. Chinese GDP grew by a breathtaking 10% in the first quarter, spurred higher by a US dollar-linked currency, and shows no sign of slowing down. Fortunately China is a big buyer of oil and gas as its own reserves are too small and not expanding fast enough.

Elsewhere, the US economy appears to be in a slow recovery and Europe is just keeping its head above water while Japan is still in difficulty. Low interest rates are the supports stopping the patients from drowning.

However, economic cycles work from boom to slump and then upwards again, and with prudent economic management business should start to pick up again. This will provide a further source of demand for increased oil production in the coming years.

Thus unless Opec adopts crazy policies like it did in 1998, and starts pumping more oil in a delicate demand situation, the chances are really quite good that the sustained high oil prices of the past few years can be maintained.

Moreover, there is a geopolitical angle to the oil price level. The Bush Administration will spend a total of around $75 billion on the takeover of Iraq this year. It knows that the best way to keep the Middle East stable is to keep the oil price at around $25 per barrel, and may reason that this is a cheaper option than further military adventures.

For reasonable oil prices will favour strong economic growth in the oil states of the region, and this money will trickle down to their neighbours. Indeed, much of this oil revenue may end up being spent promoting the kind of economic, social and even political change that the US would like to see in the region.

But the oil price is always a tough card to call, and things could go badly awry. Certainly an early return of Iraqi oil to the market, and quick lifting of UN sanctions, would not help.