Blogospheric commentary on President Bush’s failure to persuade the Saudis to pump more oil in an attempt to lower prices has largely centered on glee at the president’s discomfiture or outrage at the temerity of the Saudis (depending on which side of the political fence you sit on) and, as John Burgess notes, Saudi-bashing. There hasn’t been nearly enough analysis of the Saudis’ reasons.
The Reason They Gave
The State Department release (hat tip: John Burgess) gives the official explanation:
The Saudi oil minister, Ali al-Naimi, announced that the kingdom decided on May 10 to raise production by 300,000 barrels at the request of customers, including the United States. He said that increase was sufficient.
“Supply and demand are in balance today,” he told a news conference. “How much does Saudi Arabia need to do to satisfy people who are questioning our oil practices and policies?”
As the oil minister is undoubtedly aware, that’s double-talk. Supply and demand are in balance at any equilibrium price. That’s the definition of an equilibrium price. If the supply were to increase, supply and demand would be in balance at the new equilibrium price. Presumably, the Saudis are happy with current prices and don’t have a great deal of interest in the price of oil falling.
Sticking One in Bush’s Eye
That’s Pat Lang’s explanation:
It is most unusual for the Saudis, always the most polite of men, to act like this. It is the measure of their unhappiness with Bush and his policies that they can bring themselves to act in so boorish a way. It must make them uncomfortable to do so.
It used to be prattled in the media that the Saudis loved the Bushies (and the Bushes) and would always do what could be done to help them in the matter of oil production. It should have been clear then, and it is very clear now that this was never so. The Saudis are, like all people, concerned with their own wants and desires.
A continuing war in Iraq in which American policy has placed the despised Shia in control of the country is not among the things the Saudis would have hoped for. An unremitting hostility towards Iran which demands Saudi acquiescence in a policy likely to involve Saudi Arabia in war with Iran is not among the things the Saudis would have hoped for. The Saudis believe in dealing with problems like Iranian expansiveness with; some subtlety of negotiation, minimal but effective violence, and strategically useful bribery.
While there may be some truth in what Col. Lang has to say, once the Twin Pillars policy collapsed after the Iranian Revolution of 1979 some degree of confrontation between the KSA and Iran, the pillars, was inevitable.
They Can’t
Is it possible that the Saudis are unable to produce significantly more oil and are turning necessity into a virtue? From the Financial Times:
The fact that Russia’s oil production declined almost half a percentage point in April, the first drop in a decade, was shocking enough news from the world’s second biggest oil producer, whose output was growing at a rate of 12 per cent just five years ago. But Russian oil executives have gone a step further: Leonid Fedun, vice-president of Lukoil, told the Financial Times the country’s production may have already reached its peak.
Just days later Saudi Arabia, the world’s biggest oil producer and by far the largest exporter, confirmed it had put on hold plans to increase the kingdom’s production capacity. Ali Naimi, Saudi energy minister, said the demand forecasts he was reading did not warrant an expansion past the 12.5m b/d capacity Saudi Arabia’s fields will reach next year, following a laborious investment of more than $20bn (£10.3bn, €12.9bn). King Abdullah, the country’s ruler, put it more bluntly: “I keep no secret from you that, when there were some new finds, I told them, ‘No, leave it in the ground, with grace from God, our children need it’.”
Most other forecasts show the world will need Saudi Arabia’s oil. Thus the kingdom’s reluctance to invest further in its fields has led some to ask whether Saudi Arabia can boost production or whether, after 75 years, the world’s biggest oil deposit has been cashed.
Friday’s announcement by Mr Naimi that Saudi Arabia would pump slightly more oil did little to ease prices because it failed to reduce concerns over supply: when the kingdom produces more oil, it eats into its cushion of spare supply. This means such measures sometimes backfire, driving prices higher — the opposite of what US President George W. Bush, who requested the increased output, had in mind.
One problem is that nobody really knows what is going on inside Saudi Arabia’s oil industry. Riyadh is so guarded that analysts from Sanford Bernstein, the financial services company, took to spying on its activity via satellite. They spent nine months monitoring the country’s drilling activities and measuring whether Ghawar, the world’s biggest oilfield, had subsided. Their conclusion: Saudi Arabia is having to work harder than the country’s engineers and geologists expected in 2004 to squeeze more out of the northern part of the ageing Ghawar field.
Also, see this lengthy, highly technical article at The Oil Drum which suggests that Saudi reserves might be a lot less than they’re claiming.
It Doesn’t Make Sense for Them
In the final analysis it doesn’t make a great deal of sense for the Saudis to pump more in order to drive prices down:
In the 1990s the OPEC cartel was eager to pump more oil in a grab for cash as prices — like today — were going up, passing what then was viewed as a healthy sum in the $20-plus range. But then the Asia economic crisis struck and oil prices plummeted to below $10 a barrel.
Saudi Arabia and other producers got burned.
“They remember that and they’re not going have that happen again,” says Robert Ebel, an international energy expert at the Center for Strategic and International Studies. “They understand the market just as well as we do.”
