The Organisation of Petroleum Exporting Countries (OPEC) announced on Thursday that it would be restricting the amount of oil it supplies to the world, in an effort to boost prices.

Brent Crude, which is the international standard as it accounts for 65 per cent of globally traded oil, rose by 18 cents as a result of OPEC's announcement, to $27.05 per barrel in London yesterday.

To date this year, the cost of a barrel of Brent has increased by 36 per cent. OPEC's decision is the latest in a long line of events that have contributed to this rise. Geopolitical tensions in the Middle East, allied to fear of war in Iraq, strikes by oil workers in Venezuela, the threat of terrorism, and a deterioration in the relationship between Saudi Arabia and the West have all contributed to the dramatic rise in oil prices in 2002.

OPEC's decision came about because nine of the 10 members of the cartel cheated and exceeded their agreed production quotas in November.

It is estimated that OPEC members produced 24.5 million barrels per day (bpd) in November, roughly one-third of global demand. But OPEC was only supposed to produce 21.7 million bpd in November.

So in an effort to ensure that prices do not collapse when the peak-demand winter season ends, OPEC yesterday agreed a new, higher and more realistic production target of 23 million bpd, effectively cutting production by 1.7 million bpd.

This cut, scheduled to come into effect on January 1st, predictably caused oil to rise.

Ongoing strikes in Venezuela, the fourth-largest exporter of oil to the US, have also forced the temporary closure of some refineries. Oil industry workers are demanding the resignation of Venezuelan President Hugo Chavez and, until industrial unrest is resolved, Venezuelan supplies of oil to the US will be disrupted, and prices will be kept artificially high.

Partially because of the Venezuelan strikes, US fuel reserves (including gasoline and home heating oil stocks) are currently 6 per cent lower than a year ago.

However, while these facts explain why oil has risen so sharply year-to-date, they don't tell us where oil is set to trade over the next year. So what factors will dictate the price we pay at the pumps, or for home heating, in 2003?

Those who fear the cost of oil is set to trade higher worry that prolonged war will see Iraq destroy its oil reserves as it retreats. And they are concerned that relations between the Middle East and the West might deteriorate as a result of the war, which could theoretically see supplies from key producers such as Saudi Arabia reduced. While these fears are not unwarranted, they are very much the worst-case scenario.

In fact, OPEC's output reductions are an attempt by the cartel to reassert its credibility, because the cartel no longer commands the dominance it held in the 1970s. Countries that are not members of OPEC are increasingly supplying the market in defiance of the cartel - countries such as Russia. As production technology improves in these countries, they will help bring oil prices down going forward, irrespective of OPEC's targets.

Assuming war in Iraq is swift and successful, it's likely that Iraq's oil fields will fall under US control. This should further reduce oil prices. And in an effort to reduce their reliance on external suppliers, America, much to the consternation of the environmental lobby, has stepped up its production of oil in Alaska. Both these factors should help prices fall.

So in the short term, with the outbreak of war expected next year and ongoing South American strikes, oil prices will trade higher, perhaps spiking as high as $40 as they did during the first Gulf War.

However, as happened a decade ago, prices are expected to fall sharply after the war. And if Iraqi oil falls under western control as a result of this campaign, cheaper oil prices should be here for the foreseeable future. Until the next budget, at least.

Niall Dunne is a financial markets analyst with Ulster Bank