The agreement to boost oil supplies will be welcomed by authorities across the EU and the US, where oil price rises are viewed as among the worst price spikes, increasing inflation and lowering growth.
As economists point out, a substantial rise in oil prices increases production costs and reduces growth over the medium term. But its immediate impact is to push up prices for the consumer, which is why consumer price indices across the world have been spiking upwards recently.
However, the impact of high oil prices is less than it was in the past, when the price shocks of the 1970s undermined the global economic system.
Recently, the OECD estimated that a $10-per-barrel increase in the price of oil reduced growth in the EU by 0.2 per cent after a year and increased prices by about 1 per cent after two years. The $20 increase over the past year has pushed up consumer prices in the euro zone by just more than 1 per cent.
The agreement to produce 1.45 million more barrels of oil per day - a rise of 7 per cent - is likely to bring supply and demand more into balance. The Brent one-month future was pointing to a price of around $25 yesterday.
Some economists argue that part of the reason prices will not fall back further is that the excess oil in storage across the world has now been mostly depleted. The additional supply agreed by OPEC is not big enough to allow stocks to be replenished, so there will not be a substantial fall in prices.
However, this is not at all guaranteed. During the negotiations, the Iranians argued that the normal fall-off in demand in spring and summer would allow stocks to be built up quickly. They contended that excess supply would then see prices rapidly falling. It has been argued that the free price of oil, if there was no price-fixing, would be around $15 per barrel - the Iranians certainly appeared to believe this was possible. At the trough in January last year, the oil price briefly fell below $10 per barrel.
It is also possible that prices will rise again. But any agreement to limit prices is always an invitation to some country to give in to temptation and cheat. As a result, any limiting agreement generally has only a short lifespan. The Saudis have very large supply and are keen not to push the price so high that alternatives become economical. The Iranians, on the other hand, will run out of capacity sooner and are already producing almost as much as they can.
Around 5 per cent of the Irish consumer index is directly related to oil. However, even a doubling or a halving of the crude price does not double or halve the price of petrol. After all, most of the price paid here is tax. According to economists, merely keeping prices constant will mean a fall back in the CPI of around 1 percentage point, simply because prices have been rising for around a year now. Unless prices go on accelerating, that will fall out of the index.
A price fall of $10 per barrel to around $20 would mean a decline in the index of 1.5 to 1.75 percentage points. As a result, the March inflation index may well represent a peak - at around 4.4 per cent.
The CPI is also likely to benefit from some exchange rate stability. If the euro remains weak against the dollar and sterling, but does not fall further, it will fall out of the numbers.
On top of this, at the next Budget, the Minister for Finance merely has to put up cigarettes by less than 50p a packet and he will automatically bring the inflation rate down. As a result, the rate could begin to look quite good again going into 2001.
