As President George W. Bush arrives in Saudi Arabia today, his second [visit] to the Kingdom within the year, to formally commemorate the 75th anniversary of the establishment of the deep rooted, multifaceted Saudi-US relations, oil is reported to be very much up on his radar. Indeed with oil prices hovering around historic heights and talks of economic recession and stagflation in virtually every one’s dictionary, it would be naive to expect that when the leader of world’s largest oil consumer and the leader of the world’s largest exporter sit down for a face to face meeting, the issue would not be on [the] agenda.
And the White House admits so. Spokeswoman Dana Perino told the press before the president embarked on his regional tour that President Bush will raise the issue of high oil prices and their negative economic impact when he visits Saudi Arabia today. Reports emanating from Washington very much emphasize that when the leaders of both the countries meet… George W. Bush would rake up the issue of boosting crude production further with his hosts.
It is understandable [that] the US leader, a former oil company executive, is especially eager to avoid spiraling oil prices in the months leading up to the November presidential election, which could scuttle presumptive Republican candidate John McCain’s hopes to succeed Bush in the White House.
“I think that if there was a magic wand, and say, okay, drop price, I’d do that,” Bush said last month. “But there is no magic wand to wave right now.”
And here lies the catch. There is no magic wand to resolve this issue. Most now agree too high oil prices could be counterproductive, even from the view point of the producers. It could push the global economy further into recession destructing the demand of oil. High oil prices could also spur movement in the alternative fuel sector scuttling oil demand. Oil producers indeed want oil demand to stay firm in the coming years too, for their own reasons indeed.
Does OPEC really control the crude markets? Instead of embarking on political rhetoric, Bush needs to comprehend the situation. The combined oil production by all 13 OPEC member countries averaged 31.87 million bpd in April, the OECD Energy watchdog International Energy Agency reported. As compared to the OPEC output, IEA believes the global oil product demand to be 86.8 million barrels of oil equivalent a day for 2008 - some 1.2% rise from 2007 levels. Thus OPEC has something like [a] 37% [share of the market] at the moment.
And this leads to another deduction. Non-OPEC producers today control 63% of the global crude markets. It thus remains unclear how the Saudis have any more power to control the skyrocketing prices than the Americans.
And this is interesting…
James Williams of WTRG Economics says producing more oil may not prove effective in dropping prices. But an even bigger worry than inflating oil prices, he said, is a potentially precipitous price drop. “If stocks build up at a time of recession, it creates the possibility of an unmanageable collapse in oil prices,” he said. “If a weak US economy was contagious and it [hit] Asia, oil could drop like a rock,” he emphasized.
Time and again it has been underlined that that oil markets are being influenced by factors other than the demand-supply fundamentals. Oil prices surged earlier this week for reasons much beyond the fundamentals. If the Iranian president vowed to review output, it was more a consequence of geopolitics and not really fundamentals. And then oil eased from record highs of near $127 a barrel, after Iran reassured it had no plans to cut exports and US inventory showed a rise in the supply of distillates…
Not long ago the price of oil was about a quarter of what it is today. But soon after the invasions of Afghanistan and Iraq the price of oil began to escalate in tandem with the turbulence in the Middle East.
The war also contributes to the escalation of fuel cost in indirect ways; for example, by plunging the US ever deeper into debt and depreciating the dollar. As oil is priced largely in US dollars, oil prices generally creep up as the dollar loses value.
And the markets [became increasingly] edgy when reports of tight global supplies of distillate fuels such as diesel came in after a snag at the Grangemouth refiner in Scotland. European middle distillate stocks fell sharply in April, down 1.4% from March and 7.2% lower than a year ago, data from industry monitors Euroilstock showed.
Bush also seems to be resisting the US Senate move to suspend deliveries to the US Strategic Petroleum Reserve until crude prices fall below $75 a barrel. The move with bipartisan support wanted the Bush administration to temporarily halt the shipment of about 70,000 barrels of oil a day to the Strategic Petroleum Reserve.
And indeed one cannot forget the role of speculation here. F. William Engdahl strongly says in a recent write up that the oil markets are controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.
It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price.
Let’s be realistic, Mr. Bush!
We are living in an era where anything bullish could push prices up and you have more of a power to control those extraneous factors than indeed the Saudis. Before starting talks in Riyadh and before making political rhetoric, Sir, you need to go over the facts, closely and coolly, and it [will] be very clear, who really controls the markets. Short & Simple: It’s not Saudis, or for that matter the OPEC. Welcome to Riyadh, Sir.
Arab News, May 16, 2008. Changes were made in keeping with the editorial policy of www.memrieconomicblog.org.