Talks between the Federal Reserve and European Central Bank to support the dollar will send oil prices down, predicts OPEC President Chakib Khelil.

"I understand that there is some kind of an understanding between the Central Bank of Europe and the Federal Reserve to support the dollar," Khelil told Bloomberg TV in a telephone interview.

Falling demand this year and higher interest rates may also drive prices down, he says.

"The Federal Reserve may increase rates because of inflation concerns."

Federal Reserve Chairman Ben Bernanke has said policymakers are concerned about increasing signs of long term inflation, although they not worried about severe 1970s-type inflation or stagflation, the disastrous combination inflation and stagnant growth.

Bernanke says the Fed and Treasury Department are keeping a close watch on the dollar’s value.

The European Central Bank has opted to hold rates steady, but its president, Jean-Claude Trichet, suggested it could raise rates next month due to inflation worries. Higher rates in Europe would drive down the dollar.

As oil touched $140 a barrel, nearly doubling over last year, OPEC resisted calls to significantly increase production.

Saudi Arabia increased production by only 300,000 barrels a day. Khelil and other OPEC members have repeatedly blamed speculators and the falling dollar for the high price of crude.

"OPEC has about 2 million to 3 million barrels a day of surplus capacity, but that would have little impact on oil prices," says Khelil, who is also Algeria’s oil minister.

What will impact prices is demand and the strength of the dollar.

"They will be going down if the dollar strengthens," Khelil says.

"There are some talks between the Federal Reserve and the central bank to support the dollar," he says. "This would have more of an impact on price."

"Stocks are high, and there is equilibrium between supply and demand," he says.

Demand will probably increase next year, and OPEC will have surplus capacity larger than 2 million barrels a day, he predicts, saying most countries have made investments to increase supply.

"I’m not sure the market will demand an increased supply from OPEC in 2009, because non-OPEC supply is important and is expected to be important next year," he says, noting that OPEC contributes only about 40 percent to the world market.

Khelil criticized regulators for being slow to investigate accusations of market manipulation by speculators.

"The notion of speculators affecting the market has been known for a while. It’s not recent. They should have done it before."