WHEN the Opec cartel convenes later this week it will have to deal with demands that it rev up its capacity to supply the world with the increasing amounts of oil that America’s drivers and shivering homeowners, China’s industries, and even Europe’s stalled economies need.

The International Monetary Fund has leaked the chapter of next month’s World Economic Outlook in which it calls for Opec to provide “much better protection” against price spikes by increasing its spare capacity from about 2m barrels a day to between 3m and 5m barrels. And the Federal Reserve Board’s latest survey of the state of the American economy warns that manufacturers are regaining sufficient pricing power to enable them to pass on higher costs to consumers.

Worse still, both the experts and the markets agree that high prices are here to stay. Saudi Arabia’s oil minister, Ali Naimi, predicts that prices will be in the $40-$50 range for the foreseeable future; the futures market is suggesting that no relief is in sight from the $55 level; the US Department of Energy also agrees that high prices are here to stay; David O’Reilly, chief executive of Chevron Texaco warns that “the time when we could count on cheap oil . . . is clearly ending”; and there is talk on the street of $80 oil.

That triggers fears of inflation, sending long-term interest rates up and share prices and the dollar down, ensuring that the Fed will raise short-term rates by another quarter of a point, to 2.75%, at the meeting of its Federal Open Market Committee on March 22.

There is a growing fear that long-term interest rates, which have stayed remarkably low, will now shoot up and prick what many see as the house-price bubble, driving consumers from the malls and stalling the robust, 4+% economic growth that has finally begun to create large numbers of jobs.

Not likely, says Gavyn Davies, chairman of Fulcrum Asset Management, and a shrewd observer of the economic scene. He points out that the “productivity miracle of the late 1990s seems not to have run its course, and will for a while continue to offset upward pressures on costs”.

So, concerns about the near-term impact of oil prices in the $55-$60 range are probably overblown. There is reason to be nervous but not to panic. The more important question relates to the longer-term ability of the industry to supply oil in sufficient quantities to prevent high prices from reaching levels that do indeed trigger inflation and growth-stifling monetary tightening.

The Saudis have promised to do their share by raising output by 40%, to 12.5m barrels a day, over the next four years. And there is increasing hope that the huge reserves locked in Canada’s tar sands might come to market some time in the not-too-distant future. But many experts doubt the ability of the Saudis to increase production much beyond the 9m barrels the kingdom now pumps every day. They point out that the market needs sweet, light crude oils, rather than the heavier, sulphurous stuff that lies under Saudi sands, and they fear that Russia’s hostility to private investment will further curtail output in that oil-rich country.

This brings us to the demand side of the oil market. Bijan Mossavar-Rahmani, the head of the international independent Mondoil Corporation, says that the exclusive concentration on increasing supply is the consuming nations’ way of avoiding responsibility for adopting sensible policies to limit demand.

“If the consumers don’t like growing demand and prices to match, they can raise taxes on petroleum products, mandate conservation measures, loosen environmental standards, invest in alternatives, open up their own backyards to drilling, and draw down strategic and other reserves. Bitching about Arab sheikhs and Venezuela’s (President Hugo) Chávez won’t do it.”

He has a point. President George Bush has been urging Congress to invest in alternatives and open up Alaska to drilling, which Congress has so far refused to do. But Bush has steadfastly refused to increase taxes on oil consumption despite the fact that such increases would flow direct to the US Treasury, instead of to Saudi Arabia as they do at present.

“We have met the enemy and he is us,” moaned cartoon character Pogo in what is not a bad description of American policy. Money from oil taxes that could be funding the war on terror is instead going to Saudi Arabia, perhaps to support radical clerics or even train terrorists. Or it could be used to cut other levies, or to shore up the social-security system that the president claims is in crisis. Meanwhile, every $1 increase in oil prices sends $10 billion into the already overflowing coffers of Opec members.

Fortunately, markets — even the cartel-ridden oil market — eventually work their will — in three ways. First, sustained high oil prices will sooner or later encourage oil companies to step up the exploration activities they have long deferred in order to increase payouts to shareholders. Second, the premiums paid for light, sweet crude oils will get so large that refiners will find it profitable to invest in facilities to process more abundant, cheaper types of oil.

Finally, continued high oil prices will once again persuade consumers to cut back their use of petrol and fuel oil. Petrol prices have passed $2 a gallon (41p a litre), a bargain by high-tax European standards, but a price that gets the attention of America’s drivers. It will take time for them to react, as the current stock of cars will last a long time.

But react they will, as they have in the past. It is no accident that America now consumes far less oil per unit of gross domestic product than it did in the good old days of $3-a-barrel crude oil.

Until those adjustments occur, however, consumers will have to look to the supply side for relief. And my guess is that they will be looking in vain for a good while. 

•  Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute