WSJ's take on the oil crisis. See what you think. Next I will post you Cramer's rebuttal.
Saudi Arabia's Leverage In Oil Market Is Sapped
NEIL KING JR.
June 16, 2008; Page A8
As Saudi Arabia prepares to host a summit of oil producers and consumers Sunday, it finds itself without its usual leverage over oil markets. Concerned about the long-term impact of soaring prices, Saudi Arabia is limited in its ability to do much about it.
The world's largest oil supplier does have two blunt weapons in its arsenal if it wants to try to beat down soaring oil prices to assuage the growing outcry over pump prices in world capitals. It can open its spigots wider to put more crude on the market, and it can sharply discount that crude to get refineries to lap it up.
Industry insiders say that Saudi Arabia may employ exactly that double whammy in a bid to take the steam out of a market that has sent prices up more than 40% since the start of the year. They say that during Sunday's summit in the coastal city of Jeddah, which Riyadh called to address the problem of soaring oil prices, Saudi officials will propose boosting production by at least several hundred thousand barrels a day.
U.N. Secretary-General Ban Ki-moon said Sunday after meeting with the country's oil minister that the kingdom will raise production by 200,000 barrels a day in July. It wasn't immediately clear whether that rise would be permanent or a one-off response, as was a Saudi boost of 300,000 barrels a day in June. Saudi Arabia now pumps about 9.45 million barrels a day. On the New York Mercantile Exchange, benchmark crude for July delivery fell $1.88 Friday to settle at $134.86.
The question is whether even a temporary surge of discounted Saudi oil would be enough to reverse the most bullish oil market in decades. And if so, would the price remain lower for long?
Some industry analysts say that such a strategy, if it is employed, might not have a lasting effect and could even risk pushing prices higher if Saudi Arabia doesn't find willing customers for the additional oil at a time when demand is beginning to erode. This is especially so given that most of Saudi Arabia's excess capacity consists of heavy and high-sulfur crude, which is harder to refine into high-end products like gasoline, and therefore is much less in demand.
An effort to artificially bludgeon prices down, they say, could magnify the very concerns that have helped drive prices up in the first place -- above all, the worry over the reliability of long-term supplies. It would also mean delving into Saudi Arabia's already thin spare capacity, which has been another goad for upward prices.
One thing that nearly all sides agree on: the market isn't hankering for additional oil. Saudi officials have insisted loudly for months, most recently on Friday, that more oil wasn't the answer. Instead, they have blamed soaring prices on the falling dollar, U.S. interest-rate policy and the increasing involvement of big investment funds in the commodities market. Saudi Oil Minister Ali Naimi said Friday that soaring prices were "unjustified by the fundamentals" of supply and demand.
One of Mr. Naimi's advisers, Ibrahim al-Muhanna, expanded on that, saying in a brief interview that Saudi Arabia continues to satisfy all of its customers' demands, and that there were no signs of demand for increased supply during the most recent round of monthly sales, which occurred last week. "What we want is a stable market," he said. "We want whatever will help create stability and moderate prices."
Saudi Arabia, which supplies about 11% of the world's daily oil needs of around 86 million barrels, is under increasing pressure to do something to tamp down prices. King Abdullah told his ministers last week to pursue any remedy, according to people familiar with the matter.
The fear within Saudi Arabia is that sky-high prices will both rattle the world economy and spur efficiencies and new technologies that could undercut demand for oil in the future. Some other members of the Organization of Petroleum Exporting Countries share that concern, but only Saudi Arabia has played the role as a buffer against excess price jolts. The kingdom remains the only country with sizable excess capacity, though that has shrunk in recent years to slightly less than two million barrels a day.
During past oil-price surges such as at the start of the Iran-Iraq war in the early 1980s or after Iraq's invasion of Kuwait in 1990, Saudi Arabia flexed its oil muscle and helped drive down prices by boosting its own exports. In 1998, during a market-share battle with Venezuela and non-OPEC suppliers like Russia, Saudi Arabia used the much heavier cudgel of pouring cut-rate crude onto the market and sent prices plunging.
Today's market is very different. With the emergence of giant consumers like China and India, producers have strained to meet demand. That has diminished the ability of Saudi Arabia to use its supply cushion to help modulate markets. That may not keep the Saudis from trying, however.
"The Saudis are increasingly seeing that it is in their long-term strategic interests to bring down prices," said David Kirsch, an oil analyst at PFC Energy in Washington. "What they are going to have to do, though, is very aggressively price whatever oil they offer. That is going to be their challenge."
Refiners not only would have to go to more trouble to refine the heavier crude, they also would have to be willing to spend money to put large amounts of the oil in storage, even at the risk that oil gets still cheaper before they are able to refine it. There are strong reasons to suggest that even a sharp boost in production may do little to blunt concerns within the industry.
For one, Saudi Arabia has now made clear that it may never increase its production capacity beyond 12.5 million barrels a day -- its target for the end of 2009 -- up from its current level of 11.4 million barrels a day. After that, all drilling and exploration could go to maintain that as the country's oil fields age.
With demand still growing strongly in China and other parts of Asia, as well as within the Persian Gulf itself, the market is now digesting the fact that Saudi Arabia -- with nearly a quarter of the world's proven oil reserves -- may provide only a few of the added barrels that countries will need in the future. That has helped deepen the widespread fears over whether other suppliers can keep up with demand in the next decade.
Some analysts have pointed to the country's Khursaniya oil field, which is expected to come onstream next month, as proof that Saudi Arabia can easily bump up its production by 500,000 barrels a day if it wants. But the plan for that field was to ramp up its production slowly, while using the new stream to allow some of the country's older fields to rest.
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