The decline in oil prices in recent weeks has been a welcome relief for consumers and a rare piece of positive news in an otherwise bleak economic landscape. But for oil producers, increasingly accustomed to rising revenues, falling prices are fast turning into a cause for concern - if not quite panic.

Oil prices have fallen by a third in the past seven weeks and are headed for a drop below the symbolic $100 threshold for the first time since March. Though not a full-blown collapse, the speed of the decline is prompting some soul-searching within the Organization of the Petroleum Exporting Countries oil cartel.

Venezuela and Iran, the leading price hawks within the group, said they did not want oil to fall below $100 a barrel, a price Iran's oil minister recently said was a "minimum" level. Both countries signaled that members of the Organization of the Petroleum Exporting Countries needed to reduce their output to prevent prices from dropping further.

Other OPEC members, like Algeria or Kuwait, fear that high energy costs could jeopardize their exports as the global economy slows down and consumers reduce their consumption. Saudi Arabia, the world's top oil exporter, has not said what would be a fair price, although King Abdullah has said that $100 was too high.

For OPEC's dignitaries, meeting in Vienna next week, managing the current slowdown is tricky. Cutting production to stem the price drop could spark a backlash and paint the oil cartel as greedy and short-sighted. Leaving production unchanged may precipitate the decline in prices at a time when oil demand is slowing. "The biggest signal for OPEC is price," said Michael Wittner, the global head of oil research in London for Société Générale. "They are playing a balancing game: if prices are too high, they will kill the golden goose and hurt consumption. But at the same time, they see the weakening economy and are thinking the world doesn't need so much oil right now."

The price for oil for October delivery was down $1.57 at $107.78 a barrel in New York trading Thursday afternoon, the lowest level in five months. The drop accelerated even after Hurricane Gustav's passage over the Gulf of Mexico interrupted oil and natural gas production. Three other tropical storms are forming over the Atlantic Ocean and could yet thwart the slide in prices.

Still, prices remain historically high. Despite their fall from the record of $147.27 a barrel on July 11, oil prices are up 12.5 percent this year. They have more than quadrupled in five years.

Producers have become used to these high prices, which have powered an unprecedented economic boom in the Middle East, Russia and South America. From the gleaming towers of Abu Dhabi to the new cities burgeoning in Saudi Arabia, producers are relying on the income to develop new industries, attract new businesses and expand their economies.

This year should be no exception. OPEC's export revenue should exceed $1 trillion, according to estimates from the U.S. Department of Energy. The exporters have earned $642 billion during the first seven months of 2008, nearly as much as they did last year.

But the cartel is facing a dilemma. Demand for oil in the United States, the world's biggest market, has fallen by about one million barrels a day as a result of high prices, slowing economic growth and credit woes. The economic slump is spreading to Europe, and could also affect Asia, the main driver of oil demand growth. Also, the third quarter of the year is traditionally the time when refineries need less oil as they shut down for their annual maintenance.

At a recent meeting of producers and consumers in Jidda, Saudi Arabia pledged to keep pumping full out to bring prices down. The kingdom is OPEC's biggest producer and the group's de facto leader. At the same time, analysts said, the Saudis realize that if they keep their output at the current level, they will create a glut in the market. The kingdom is pumping about 600,000 barrels a day more than its official quota.

Some analysts believe the group may opt for an informal cut in production, reducing output without much fanfare, instead of a formal announcement that could prove to be too politically sensitive for some of the cartel's pro-Western allies, especially with the U.S. election season in full swing.



Another option may be to convene another meeting in six to eight weeks and announce a big reduction then. The group is already scheduled to meet in December in Algeria, but that could be too late for Organization of the Petroleum Exporting Countries to act if prices keep declining through the autumn.

The price of crude oil surged more than $2 a barrel as the approach of Hurricane Ike delayed the restart of production from the Gulf of Mexico. Royal Dutch Shell evacuated workers from Gulf platforms or kept staff onshore who were moved from the path of Hurricane Gustav last month.

"We've already gone a full week and a half with production shut in from Hurricane Gustav," Stephen Schork, president of energy markets analysis firm Schork Group, told Bloomberg television. ''Now everything has to be shut down again for at least another week."

Crude oil for October delivery rose as much as $2.72, or 2.6pc, to $108.95 a barrel in after-hours trading in New York. In London, brent crude oil for October settlement rose as much as $2.57, or 2.5pc, to $106.66 a barrel. However, prices later eased to trade up 76 cents in London at $104.85 and up 51 cents in New York at $106.74.

Prices were also buoyed after the US government seized control of Fannie Mae and Freddie Mac, backers of about half the nation's home loans. The effective nationalisation of the troubled lenders put an end to the recent rally in the dollar as investors bought riskier currencies such as the Australian and New Zealand dollars. The deepening global slowdown has hit demand for oil, while the recent rally in the US currency has lessened oil's attractiveness as a dollar hedge. The oil price fell 8pc last week and is now sharply lower from the record $147 a barrel reached in early July.

The recent rise in prices may ease pressure from hard-line members of the OPEC oil producers' group, who have stepped up demands for a cut in production in a bid to keep crude above $100 a barrel.

At a key meeting of OPEC members tomorrow, Saudi Arabia will come under pressure to reverse output increases that Riyadh made earlier this year following intense lobbying by Washington.

Analysts say that the key decision OPEC must make at the meeting in Vienna is how to maximise revenues without choking off further demand in a worsening economic situation.

Companies operating in the Gulf of Mexico account for 26pc of US crude production and 14pc of natural-gas output.

Oil prices sank to a five-month low today as a jump in the U.S. unemployment rate signaled to traders that Americans might keep paring back their energy use to save money. The Labor Department said the economy lost jobs in August for the eighth consecutive month — and at a faster-than-expected pace. The unemployment rate spiked to 6.1 percent from 5.7 percent in July, above the 5.8 percent rate that analysts forecast.

"There's been a terrific amount of growing concern about the outlook for demand globally," said John Kilduff, senior vice president of risk management at MF Global LLC. "Today's employment report emboldened that concern."

Light, sweet crude for October delivery fell $1.66 to settle at $106.23 a barrel on the New York Mercantile Exchange — its lowest settlement since early April. During the session, it fell as low as $105.13.

Since surging to a record $147.27 a barrel on July 11, crude has tumbled by over $40, or more than 27 percent.

What could possibly stanch the drop is a cutback in production. Investors are waiting to see if Organization of the Petroleum Exporting Countries decides to restrict oil output at its meeting next week in Vienna in response to the two-month plunge in prices. The Organization of the Petroleum Exporting Countries has indicated it may take action to defend the $100-a-barrel level for crude.

But with the dollar on the rebound, many analysts say even a production cutback could prove ineffectual in boosting oil prices.

The dollar weakened modestly against the euro and pound today after the employment report, but rose against the yen. The dollar's recent comeback has helped accelerate oil's price decline. Commodities were bought by many funds to hedge against inflation and weakness in the U.S. currency, so when the dollar rebounded, funds unwound those hedges, thereby driving commodities prices lower.

The jump in the dollar and the decline in oil has also been driven by signs of economic weakness in developing countries around the world — particularly those in Western Europe.

"It's sort of a race to the bottom among the leading economies — Europe is ahead at the moment. That's pumping up the dollar, or making the dollar economy seem much less worse," Kilduff said.

Heating oil futures fell 5.59 cents to $2.9678 a gallon on the Nymex, where gasoline prices dropped 6.19 cents to $2.6785 a gallon. Natural gas for October delivery edged up by 4.1 cents to $7.363 per 1,000 cubic feet.

In London, October Brent crude fell $2.25 to $104.14 a barrel on the ICE Futures exchange.

In addition to economic indicators and Organization of the Petroleum Exporting Countries, traders are keeping an eye on storms developing in the Atlantic. Forecasters do not expect Hanna, Ike or Josephine to head for key oil facilities in the Gulf of Mexico, but the hurricane season is not officially over until the end of November.

The Energy Department's weekly U.S. oil inventory report released Thursday showed a decline in gasoline inventories last week that was smaller than expected. But the report also showed surprising drops in stockpiles of crude and distillates, which include diesel fuel and heating oil; analysts had expected increases.

U.S. gasoline demand has been hovering about 1.6 percent to 3.1 percent lower than a year ago, but demand for distillates is still higher than a year ago, according to Peter Beutel, head of the energy risk management firm Cameron Hanover.

Meanwhile, distillate imports are at their lowest level in years, he wrote in his research note.

"If any rally gets going, distillate is likely to lead it," Beutel wrote.

The average U.S. retail price of a gallon of gasoline was at $3.674, down marginally from Thursday and down more than 10 percent from the July 17 record high of $4.114 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express.

Oil prices fell again as the dollar continued to strengthen and investors turned their attention to slowing worldwide demand for crude now that concerns over the impact of Hurricane Gustav have begun to fade. At one point, the price of a barrel was trading in New York below $105.05 - its lowest level since April and sharply down on the record $147.27 seen on July 11 - before rising above $108.

But there were warnings that OPEC was unlikely to let the oil price slip much further as members of the oil producers' cartel seek to keep crude above $100 a barrel by cutting production.

Since July, oil's bull run has been stopped in its tracks amid the economic downturn in America, Europe and Japan.

"That's been a focus of the market, that the demand side has weakened, particularly in developed countries like the US," said David Moore, commodity strategist at Commonwealth Bank of Australia.

"Had it not been for the hurricane, we would have seen a lower price profile over the last week." Robert Nunan, of Mitsubishi Bank, added: "Everyone's worried about demand destruction."

As Gustav swept towards the Gulf of Mexico companies shut down 13 oil and gas platforms and evacuated personnel, pushing up the crude price.

Staff are now returning to the platforms, which escaped serious damage. In 2005, Hurricanes Katrina and Rita caused several weeks of shutdowns.

Should the oil price drift further towards $100 a barrel, analysts believe Opec will seek cuts in production to underpin the price. OPEC next meets on September 9, in Vienna.

Tobias Merath, head of commodities research at Credit Suisse, believes that production curbs will keep oil at between £100 and $110 a barrel for the rest of the year.

He told the Reuters news agency: "On oil, I think the bulk of the correction is behind us. We think it can test $100 or drop slightly below it in a couple of weeks, but it should not remain below $100 on a sustained basis."

Mr Merath said that weaker demand for crude from the US and OECD countries in recent months has offset higher demand from emerging markets like China and India, keeping overall consumption flat.

"At the same time, OPEC countries are producing quite a bit of oil since March and that is apparently working. But the moment oil drops below $100, they will be quick to cut back production," he said. "We expect a recovery in oil prices in 2009. We expect prices to hover between $115 and $120 in 2009."

At the moment OPEC remains split on production cuts. Venezuela has led demands for cuts, but Ecuador's oil minister, Galo Chiriboga, said yesterday that output levels should remain unchanged.