The Organisation of the Petroleum Exporting Countries and international oil companies are investing too little in production and refining to reduce record prices in the next five years and possibly beyond, the International Monetary Fund will warn this week.

In a draft of the main chapter of its World Economic Outlook, the IMF writes: “Based on current investment plans, production capacity is unlikely to grow enough to outpace future growth in consumption and create adequate spare capacity.”

The warning comes as Opec, the cartel that supplies 40 per cent of the world's oil, meets in Vienna today to consider a third consecutive increase in its production quota this year.

Barring any last-minute opposition, the group is expected to raise its ceiling by at least 500,000 barrels a day, bringing it to a record 28.5m b/d. Ali Naimi, Saudi Arabia's oil minister, echoed many other ministers' views when he said the increase was merely a gesture of goodwill because the market was well supplied.

“The constraints are downstream. Katrina damaged some infrastructure [including several major refineries in the US Gulf] and that's why people aren't taking crude.”

The IMF's report, which will be published on Wednesday, says Opec's ability to lower prices is limited because its cushion of spare oil capacity has shrunk due to high demand, mainly from the US and China.

The report predicts that the situation is unlikely to improve in the next five years even though Opec has begun to boost investment. Spare oil production capacity held by Opec countries, especially Saudi Arabia, which helps to cushion the oil market against unexpected supply shocks, has shrunk to 1.4m barrels a day the lowest in a generation. Another increase in the quota this week which some delegates would like to be as high as 1m barrels is likely to erode that spare capacity.

The IMF goes on to chastise international oil companies for being too conservative in their risk assessments when deciding whether or not to invest in new projects.

Most leading oil companies say that they still only invest in projects that would still be profitable if prices fell to $20-$25 a barrel. This is in spite of the fact that many analysts predict prices will remain above $50 until 2010.

The IMF in its report raises its predictions for this year and the next from about $45 a barrel to $55.

The IMF says: “International oil companies could contribute by basing their investment decisions on more realistic risk and return trade-off analysis.”

Oil producing countries also fail to escape criticism. In cautious diplomatic language, the IMF blames them for slowing development of new fields by unexpected and frequent tax changes.

Even some leading industrial countries, such as the UK and Russia, have been guilty of carrying out such tax regime changes in the past three years while others, such as Saudi Arabia and Mexico, bar international companies from their natural resources.

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