Eagle eye on Opec and world economy

NEW YORK - US Treasury Secretary John Snow hopes Opec's decision to cut oil output by about 4 per cent will not undermine the global economy.

The Organisation of Petroleum Exporting Countries, which produces more than a third of the world's crude, says it will reduce supplies by 1 million barrels and meet its quota of 27 million barrels a day.

The aim is to prop up prices after the biggest decline in three years.

Oil still costs 28 per cent more than a year ago and is poised for its fifth annual gain in six years.

Snow has expressed concern throughout this year that oil above US$40 a barrel poses a threat to the US and world economies by crimping spending and fanning inflation.

"It is a matter we will want to follow and follow closely," Snow told reporters in Rabat, Morocco, after attending a summit of finance and foreign ministers from North Africa and the Middle East.

"The global economy is on a good growth path and it's important we stay on that path and that requires all of us to do what we can to maintain the current momentum."

Oil fell from a record US$55.67 a barrel on October 21 to a four-month low of $40.71 in New York trading on Friday on scepticism that Opec will follow through on its plan.

That 27 per cent decline was the largest six-week loss since after the September 11 attacks.

Opec oil ministers, including Ali al-Naimi of Saudi Arabia, said on Saturday they expected oil prices to rise as production was cut.

The International Energy Agency, an adviser to oil-importing countries, yesterday said Opec shouldn't reduce supplies until world oil inventories increase.

In October, Snow said oil prices above US$50 a barrel were a "headwind" to growth and joined counterparts from the Group of Seven industrial nations in repeating a request, first made in May when crude was US$41.85 a barrel, that Opec provide "adequate supplies".

High oil prices foreshadowed economic slowdowns in each of the past three decades and provide a headache for central bankers and finance ministers by stoking inflation while eroding corporate profit margins and disposable incomes.

The International Monetary Fund calculates every US$5 rise in oil prices shaves 0.3 of a percentage point off growth.

The IMF said last month it was scaling down its expectations for world economic growth, in part due to oil prices.

- BLOOMBERG