WHEN I was in Boston ten days ago, financial analysts had two main worries about the world economy and the outlook for stock markets. The first was that the interest rate cycle had turned and that world interests rates, including those of the United States, would now be on a rising trend. The second was that the relatively high oil price, which had been around $40 a barrel for some months already, would rise still farther. These two worries made a majority of the analysts I talked to fear that next year would be a “down year” for the world and for Wall Street.

Of course, the two worries are closely linked. High or rising oil prices have an inflationary effect on all costs. In the 1970s, when oil prices rose almost vertically, there was hyperinflation and interest rates went up proportionately. If oil prices do continue to rise from their present level, interest rates will follow. In Britain, rates are already going up on account of the boom in house prices.

Last week two international meetings were discussing the future of the oil market. The first was the meeting of the Opec ministers in Amsterdam. The Saudi Arabian Oil Minister, Ali Naimi, put forward a proposal that his country should be allowed to increase supply. He argued that: “Recent revisions in oil demand and supply projections for the coming months point to an increase in the required production from Opec by an excess of two million barrels a day.” He spoke of his concern “for market stability, supply continuity and the growth of the world economy”.

Other Opec countries were not so keen. Inside Opec, only Saudi Arabia and Kuwait are in a position to pump more oil, though several countries outside Opec, have some spare capacity. Most Opec countries would lose money if production increased and prices fell, particularly if they fell to the old Opec target zone of $25-$28 a barrel.

The Venezuelans argued that the present high prices were the result of speculation, and were therefore temporary. Other commodity markets, including copper, have indeed fallen sharply when speculative positions were closed, though it seems unlikely that the oil price will fall unless production is increased. The outcome of the meeting was to postpone the decision until next month. There is some hope, but no certainty, that Opec will then agree to increase the oil supply as the Saudis propose.

The US is pressing for that.

The second important meeting was that of the G8 finance ministers in New York. Gordon Brown gave warning of the inflationary consequences if oil continued to be priced at $40 a barrel. Some analysts argue that Opec is already producing more than current quotas, and that even a formal increase of two million barrels might make little difference to the oil price. It might, however, at least prevent a further rise.

In the 1970s and early 1980s, the oil shocks were caused by the oil sheikhs. The first cut in production was motivated by the Arab reaction to defeat in the war of Yom Kippur in 1973. Arab Opec cut its production to penalise the Western countries for their support of Israel.

Opec then controlled half the world oil supply and was able to manipulate supply to raise prices — the operation of a traditional cartel. Opec’s share of world production is now down to about a third, but it still has two thirds of world oil reserves.

This year, for the first time, the oil shock, though a milder one, has come from the demand rather than the supply side. Opec could indeed produce the extra couple of a million barrels, and the non-Opec countries could produce their extra barrels, but total world capacity is now uncomfortably close to current demand. Extra investment and the exploitation of higher-cost oils can produce a larger supply, but it would need both time and money.

The G8 countries continue to consume huge quantities of oil, but it is China which is the new factor. In The Sunday Times yesterday there was a fascinating article by Dominic O’Connell which gives some details of China’s entry into the automobile age.

One needs, first of all, to realise that, even in China, petrol for motor cars comes on top of the base load of oil needed for industry and other transport. The Chinese economy has been growing at 8-10 per cent a year for the past 24 years. That means that it has doubled three times. When one says that the Chinese economy has grown by 9 per cent, at an annual rate, in the first quarter of 2004, that is the equivalent of adding to Chinese production the whole Chinese economy of 1976, the year Chairman Mao died.

It is, however, the growth of Chinese car ownership which is now the most remarkable development. China is following the example of the US in the 1920s, when the Republicans promised: “A car in every garage and a chicken in every pot.”

Times Recommends

• Treat Africans as part of the human jigsaw
• Too bitter a pill for me to swallow
• This Bill is a panic measure in a tarnished age