Algerian Energy Minister and OPEC President Chakib Khelil, in Algiers on Saturday, warned of a surprise decision on output cuts when OPEC meets Dec. 17. (Alfred de Montesquiou/Associated Press)

OPEC's president says oil markets should brace for big output cuts when the cartel meets Dec. 17.

OPEC President Chakib Khelil, who is also Algeria's minister for energy and mines, told the Associated Press that a consensus has emerged among OPEC producers that a "significant reduction" is warranted by the current price slide.

Khelil would not discuss specifically how deep the cut might be. But he used the word "severe," and noted that some analysts have predicted cuts of as much as two million barrels a day.

OPEC previously announced a 1.5-million-barrel-a-day reduction in October, but the decision failed to halt the fall in prices and markets have been expecting another cut at the Dec. 17 summit.

Oil prices settled Friday at a four-year low of $40.81 US a barrel. In July, prices peaked at record highs above $140 a barrel.

"The stronger the decision, the faster prices will pick up," Khelil said.

He urged oil producers outside OPEC to help the cartel regulate prices, especially Russia, which has said it could sign a co-operation memorandum with the cartel in the Algerian city of Oran.

He acknowledged the cartel has little control over prices at the moment because of the slumping world economy, which has considerably reduced demand for oil.

He pointed out that cartel countries produce only 40 per cent of the world's oil. "The probability that we can adjust supply to demand is very weak," he said. "In an unstable system, you react by trial and error."

He said fixing oil output levels has become "a Kafkaesque situation" since OPEC wants to maintain its revenue stream without worsening the recession in the U.S. or Europe.

"I really don't think OPEC wants to hurt the world economy," he said.

But oil prices that remain too low would start hurting wealthy oil producers, he warned, adding to the global recession.

If oil is sold at below production costs, oil-producing nations would have to end their investments abroad and could themselves enter a recession, Khelil warned. "We'd then see a debacle" worldwide, he said.

The International Monetary Fund and several stock markets have asked wealthy producers to reinvest some of the cash they piled up when oil was at over $100 a barrel.

Oil stability is crucial to a country like Algeria, where oil and natural gas make up 97 per cent of exports. Khelil said Algeria based its 2009 budget on oil at $37 a barrel, but would have to cut back on large infrastructure projects if the price goes lower.

In Baghdad, a senior Iraqi official warned Saturday that current prices are not healthy for Iraq's economy.

"OPEC needs to take quick action to reduce the offered quantities because the market is oversupplied," said Falah al-Amiri, head of the state oil marketing arm SOMO.

He said OPEC would adopt "limited cuts" at the Dec. 17 meeting but did not elaborate.

Khelil predicted demand would rise by mid-2009, saying a fair price for oil would be "at least $70" a barrel.

Too-low prices are not in the interest of oil-consuming countries either, he said, because they hinder investment and exploration for future production. He noted that several offshore drilling projects were already being postponed around the world.

"We'll need these projects to meet demand in two or three years," he said.