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Opec cut amounts to a tax on world consumption

The decision of the Organization of Petroleum Exporting Countries to cut production means that oil prices are set to stay high. This will keep Europe's consumers spending less and will dim prospects for eurozone recovery.

Why is Opec cutting production? Saudi Arabia is the swing producer in the cartel. The Saudis are worried that the US is considering ditching them as allies in the Middle East. By cutting production, the Saudis are telling the US that it needs them just as much as the Saudis need the Americans. Significantly, the Russians have backed the Opec cut for the same reason.

Saudi-Russian collusion Until the Opec meeting, the consensus was that the crude oil price would fall to below $20 a barrel over the next year. Energy traders thought Saudi Arabia had no cards to play, as Iraqi oil was set to come on stream and stocks were recovering. However, early in September, Saudi Arabia's crown prince Abdullah visited Russian president Vladimir Putin. Russia, it transpires, agreed with the Saudis that Opec production quotas would be cut by 3.5%.

The official reason given for the cut was the likely rapid return of Iraqi oil production. But the real reason is political.

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