Global hardships, strikes, and other unrest over prices led to Saudi
Arabia's meeting of oil VIPs set for June 22. But it's not clear what can be
Worried about a potential political backlash from oil that is trading at over
$130 per barrel, the Saudis are ratcheting up their effort to cool things down.
The Saudis have promised an additional 300,000 barrels a day of supply beginning
this month. That would bring their daily output to 9.45 million barrels. They
have also called a meeting for June 22 in Jeddah, Saudi Arabia, to discuss the
situation. Various energy ministers—including the U.S. Energy Secretary Samuel
Bodman—oil company chiefs, and financiers are expected to attend. In a sign of
the importance the Saudis attach to the meeting, King Abdullah will preside.
"When you see the increase in price and these gyrations—$11 per barrel in one
day—this is unacceptable to us," Ibrahim al-Muhanna, the Saudi oil ministry
spokesman, told MEES, the trade journal. "This could hurt the global economy and
even the long-term interest in oil."
Those are strong statements from a Saudi official. David Kirsch, an analyst at
consultants PFC Energy in Washington, says the Saudis are concerned about the
political ramifications of high prices when it comes to their key customers in
the U.S. and in Asia. They worry that this bout of price hikes could lead to the
U.S. Congress taking drastic measures. They are also worried high prices could
hurt their ambitions to build refineries and distribution networks in
fast-growing Asia. "The Saudis don't want to be seen as a scapegoat if the world
economy goes into recession," Kirsch says.
Rumors of Increased Production
The Saudis are keeping mum about what if anything they plan to propose at the
meeting. They are skeptical of adding even more oil to the market because,
according to Kirsch, they aren't having an easy time finding customers for the
extra 300,000 barrels. Also, many refiners take the same amount of Saudi crude
each month regardless of pricing because they don't want to alter their refinery
configurations. Moreover, much of Saudi spare capacity is heavy crude that many
refineries don't want.
However, there are unconfirmed market rumors that the Saudis may increase
production to 10 million barrels per day. This would show skeptics that they
have the goods—i.e., oil—to control prices when they want to. Of course from the
Saudi and OPEC point of view there is a danger that drastic Saudi action would
trigger a price cut.
There are signs that high prices and volatility could be setting the stage for a
correction. Europe has been hit with unrest over fuel costs, including strikes
by truckers and fishermen. Costly fuel is crimping the economies of many
developing countries and creating hardships. High prices are also starting to
curb demand for oil. The International Energy Agency in its latest monthly
report predicted a sharp 500,000 barrel-per-day drop in oil consumption in North
America as drivers cut their mileage.
Focused on Potential Shortages
But whether the fall in demand in the industrialized West will be enough to
spark a market correction soon is still unclear. Demand remains strong in China
and some emerging markets, including most OPEC countries, where fuel is
subsidized and consumers are shielded from price rises.
So far the market has largely shrugged off the mounting evidence of falling
demand and chosen to focus on potential shortages caused by everything from
strikes in Nigeria, to Israeli threats to bomb Iran, to the hurricane season on
the U.S. Gulf coast.
In addition, with world markets volatile, prices are being influenced by a wide
range of factors that extend well beyond fundamentals. For instance, the weak
dollar and increasing concerns about inflation are creating upward pressures on
oil. That relationship was shown clearly when European Central Bank President
Jean-Claude Trichet suggested on June 5 that he might raise interest rates. As
much as anything, it was those comments that ignited the surge of oil prices to
just under $140 per barrel on June 6.
Trichet was trying to curb inflation expectations. But by talking about raising
rates, he wound up in the short term doing just the opposite. His comments
weakened the dollar, boosting oil prices. This little episode shows how
difficult it will be for the Saudis—or anyone—to bring prices down.