The two parties started to lay out their cards even before the meeting at the Crawford ranch began last Monday. As Crown Prince Abdullah and President Bush were getting ready for their historic meeting interesting things were taking place at rapid pace, both on and off the record, on the energy sector as well. As per the initial feedback and as was anticipated, “the petroleum file” figured prominently during the course of frank and extended discussions.
Earlier last week President Bush termed the rising oil prices “troubling” and suggested he planned to put pressure on oil producers — to bring the prices down. “I would be talking to our friends to make sure if they pinch the economy too much, it will affect their ability to sell crude in the longer run,” the President then told his audience. He very much indicated then that he would raise the issue during the meeting with Crown Prince. And he did so. However, as the president of the world’s only super power started to position himself for the duet, the Saudi side was also seen preparing and positioning for it.
On the sidelines of the sixth international oil summit in Paris last week, the Saudi oil minister, who was a part of the Saudi delegation that went to the Texas Ranch of President Bush, indicated in very clear terms that the ability of the Kingdom and the rest of the OPEC oil producers’ to rein in the galloping crude prices is limited. He made it clear that there was a limit to the efforts Saudi Arabia could make and other parties have to join in. The onus to control the crude market could not lie solely with the Saudis and the OPEC and he was indeed right.
• There is no worrisome lack of supply. With more than 1.5 million barrels of spare capacity, Saudi Arabia can pump enough oil to offset any disruptions, short of the most catastrophic scenarios.
• Higher prices will eventually cause gasoline demand to taper off, which is now about two percent higher than year ago. And further higher prices will lead producers to pump more, as is the case now.
The US Strategic Petroleum Reserve, which the Bush administration has been filling at an average rate of nearly 250,000 barrels a day, is now nearly full. By August the market should have that much more supply of light, sweet crude available to it.
However, one factor currently hurting the crude markets greatly, and also pointed out by Minister of Petroleum and Mineral Resources Ali Al-Naimi, is the role of speculators in the crude markets. Al-Naimi clearly said the ability of the Kingdom and other OPEC producers to control prices had been weakened by the growing influence of big money funds on prices and refinery bottlenecks in major consuming nations. “If you convince the consuming governments to increase real interest rates, you will see an outflow of from the futures market,” he asserted. As soon as the speculators notice, interest rates moving, they will probably go into better financial instruments such as bonds, Al-Naimi added. He was indeed not far off the point. Some analysts admit if the speculators and the fear factor could be taken off the market, prices would easily tumble by $15 a barrel. That would be more than enough to satisfy the nerves in the consuming world, most agree here.
Then the issue of refining capacity is something the US especially needs to address in a big way. Saudi oil minister have said it time and again they are ready to invest in refining capacities in the US so to take care of bottlenecks, so as to ease pressure on market prices. The bottlenecks in the US refining capacity was again underlined late last week, when crude prices crawled back to around $55 a barrel on news of US refining issues.
There could not have been a better time for Al-Naimi to highlight the issues, impacting the global crude markets, much beyond the OPEC control. After all he knew he could be in for some plain talking at the Crawford ranch. He was indeed prepared for that.
