Why oil prices are stubbornly high

Show me the oil!

That, in essence, is what the markets are likely to say about OPEC's professed intention to increase production in an attempt to lower oil prices.

In the past, mere words from OPEC ministers were enough. Oil prices shuddered and fell at the merest hint of opened spigots.

But no longer. As the 11 oil-producing and exporting nations meet Thursday in Beirut, a different factor is in play: Spare production capacity is now at one of its lowest points since the early 1970s.

Tight inventories and rising demand in parts of the world, most notably China, have forced the world to operate on an unusually low margin. And any disruption could have serious consequences.

Thus energy analysts believe that OPEC will have to back up its statements by pumping oil out of the ground. "It will take a physical presence of oil to deflate expectations," says Michelle Billig, a fellow at the Council on Foreign Relations and a former analyst at the Department of Energy.

The bulk of any increased output is expected to fall on Saudi Arabia, but skeptics wonder if the oil kingdom can keep its oil infrastructure secure while it pumps an extra 1.5 million barrels of oil per day. Wednesday the United Arab Emirates, the only other nation with spare capacity, said it would produce an extra 400,000 barrels of crude oil per day.

There will be even more urgency to the Beirut meeting because high oil prices preceded the last several recessions. And oil ministers are mindful of the fact that after similar run-ups, the price of oil has plunged as the world sought alternative energy sources. "The Saudis have an interest in seeing the price of oil fall," says Robert Hormats, vice chairman of Goldman Sachs International. "They don't want to price oil out of the market."

Next week, when the major consuming nations meet for their annual G-8 summit, energy is likely to be high on the agenda. "It has to be," says Mr. Hormats, noting that the oil crisis of 1973 was the catalyst for the summits to begin with. "Here we are 30 summits later, and we're still relying on imported oil."

In fact, the G-8 has invited two OPEC members - Nigeria and Algeria - to be guests at the meeting in Sea Island, Ga.

If Saudi Arabia does increase production, it wouldn't be the first time it ramped up before an election, says Gary Taylor, a principal at the Brattle Group in Cambridge, Mass. "The Saudis love to help us before the elections," he says. [Editor's note: The original version misspelled the name of Taylor's company and located the company in the wrong city.]

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