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Oil prices have been climbing inexorably. Last week, a barrel of crude fetched $34.90, a level not seen since the Persian Gulf War. Consumer outrage has been growing. Something had to be done, and on Sunday the Organization of Petroleum Exporting Countries responded, agreeing to raise oil production by 800,000 barrels a day in hopes of halting a further surge in prices. Saudi Arabia, in particular, appears to recognize that excessively high energy prices are in no one’s interest, threatening to derail the global economy. Unfortunately, there is little hope of price stability for some time.

Oil prices bottomed out in 1998 at $10 a barrel. They have climbed relentlessly since, despite two production hikes in the last year alone by OPEC. This summer, Saudi Arabia announced that it would unilaterally increase production by 500,000 barrels a day. Prices leveled out briefly and then continued upward. The same could well happen this time.

Quite simply, the demand for energy is outstripping supply. The low point in oil prices coincided with the Asian financial crisis and the ensuing slump. The global economy has since recovered and prices have risen accordingly. Strong growth in Asia, the United States and Europe has prompted talk of a “third oil shock,” which began in March, 1999.

The problem is that OPEC is running very nearly at full capacity. The latest boost represents the upper limit of potential extra output. Yet twice that amount is needed to stem demand pressures. And rising prices are creating political pressures. The European Union, for example, warned OPEC last week of the threat created by “current movements in oil prices.” And OPEC is always a popular target during a U.S. election.

Rock-bottom prices are not the answer. Russia, for example, needs oil revenues to balance its accounts and pay for its loans. Without sufficient income, producers and refiners will not keep facilities open, and supplies will yo-yo. Price stability is needed, but that will require some coordination between producers and consumers and there is little sign of that on the horizon, despite OPEC’s welcome move.

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