This weekend is crucial for the future of oil prices. Despite assurances from commentators over the summer, the price of oil has shown no sign of falling back and indeed this week reached 10-year highs.
The high level of oil prices is becoming a growing political concern across the West. Here, the Minister for Finance, Mr McCreevy, would love to see a fall in prices, which would cut the inflation rate. Earlier in the week, French fishermen severely disrupted shipping off the country's coasts in a protest against rising fuel costs.
The French government cut duty, and further concessions were agreed after truckers and others blocked refineries and fuel depots, but this still did not resolve the issue. In the US, the price of gasoline has become a political issue in the run-up to the presidential election, prompting Mr Bill Richardson, US energy secretary, to call on the Organisation of Petroleum Exporting Countries (OPEC) to lift production and President Clinton to hold meetings with a variety of oil-producing states including Nigeria and Saudi Arabia.
All eyes are now on this weekend's meeting of the Organisation of Petroleum Exporting Countries (OPEC), which begins in Vienna on Sunday, to see whether or not prices are to fall. OPEC is expected to raise its output by 500,000 barrels per day, but will that be enough to cool oil prices?
European countries and the US will be hoping that Saudi Arabia can persuade the other oil-producing nations to up production, but there is a real danger that little impact will be felt on the oil price either way.
After the failed bid earlier this summer to sustain prices at around $25 a barrel, it is now clear that the market is more complex than that hope would imply.
Some observers even think the price could almost double, which would have a severe impact on inflation in Europe, in particular as the weak euro exacerbates all dollar-denominated oil price moves. Goldman Sachs has suggested $50 a barrel as a genuine possibility.
An analysis by HedgeGear shows that oil prices would rise to more than $54 in the next three years, with a probability of 60 per cent. The likelihood that oil prices would rise above $70 in the same period is 8.3 per cent. A major obstacle to reaching agreement within OPEC is that certain members, including Venezuela and Iran, would like to maintain higher oil prices. Saudi Arabia has been coming under increasing pressure from the US and it has responded by calling for talks between oil consuming and oil producing nations to halt the rise.
But it fears appearing to be bending too easily to US pressure, particularly among countries such as Iraq, Libya and Iran, and especially at a time when Arab opinion is critical of US policies in the Middle East peace process.
Saudi Crown Prince Abdullah, who met President Clinton in New York earlier this week, is very different from King Fahd. He is said to be far more of a pragmatist and a nationalist, who wants to strengthen Saudi Arabia's ties in the region and particularly within OPEC. The country's position was weakened a little earlier this summer when Saudi Arabia unilaterally decided to increase oil production under pressure from the US
It is also clear that, despite the rhetoric, it is in Saudi Arabia's interests to keep oil prices as high as possible without giving a major incentive to switch to other forms of energy or to cause a world recession.
As one oil sheikh, contributing to a Financial Times online discussion site this week, put it: "The largest consumer in the world for oil, the US, has enjoyed a very long boom in the 1990s. In the oil-producing Middle East, we instead have had serious recession during the same period.
"For a commodity which is exhaustible in time, we watch with alarm how the asset values in areas such as US equities and US real estate have inflated to a mad status. We think we have no choice but to raise up the oil price in tandem with the `boom' in the rich economies of the consuming West . . . It will rise as high as we think the market could stomach."
Whether or not this is genuine, any rise in production is unlikely to make up for the shortage of supplies in the US and elsewhere heading into the winter months. Despite a 700,000 barrel-per-day production increase agreed to by OPEC in June and the announcement by Saudi Arabia in July that it would increase production by 500,000 barrels per day, oil prices have continued to rise. Stockpiles of oil in the US are at their lowest levels for more than 20 years. The oil price has tripled in the past 18 months, despite production increases. Most OPEC countries, with the exceptions of Saudi Arabia, Kuwait and the United Arab Emirates, are already producing at or close to full capacity. The world's tanker fleet is operating at 97 per cent capacity for the first time since 1973. Many refineries are also working at full speed. Not all the blame lies with the oil producing nations. Mr Ali Rodriguez, OPEC president, blamed the current steep oil prices on low distillate stocks, rather than any shortage of OPEC crude oil.
Around two years ago, crude prices briefly touched $10 a barrel. As a result multinational oil companies saw billions wiped off their profits and have since sought to make up for this. Another problem is that the future price of oil is lower than the current price and thus there is no incentive to hold stocks. The solution is to persuade the oil companies that the price of oil is going to be higher in the future, which would encourage refineries to buy cheaper oil now to add to inventories. The problem is of course that such a reversal could require a shock that could just as easily send prices tumbling out of control as stabilise them.
Unless there is a surprise announcement this weekend, Mr McCreevy is likely to be the invidious position of raising inflation forecasts yet again, with no sign of the hoped-for turn down at the end of the year.
