Last week the Saudis called a meeting of oil producers and consumers at Jiddah on the Red Sea for June 22. The immediate reason for the call was a one-day jump of $11 in the price of oil to a new high of nearly $140 a barrel. This increase was coupled with a spate of forecasters talking about $200 and even $250 oil in the near future.
Although demand has remained remarkably strong in recent years as prices moved from $10 to $140, most recognize that a breaking point in the world’s ability to afford oil is not far away. Once this point is reached, alternatives to current levels of oil consumption, ranging from doing without to electricity generated from renewables, would become so attractive that demand and prices for oil would drop, perhaps precipitously. Over 30 chief executives of national and international oil companies around the world were invited to the Jiddah meeting along with energy and economic ministers from 26 countries, including China, India, and Mexico.
The announcement of the meeting was followed by press stories citing unnamed Saudi spokesmen that another increase in Saudi oil production would be announced at Jiddah. The New York Times went so far to as to put this increase at an additional 500,000 barrels a day (b/d) on top of the 300,000 announced last month. The combined increase of 800,000 b/d would put Saudi production over 10 million b/d for the first time in decades. Oil prices fell for a while on the good news until cooler heads began to question whether the Saudis could actually increase production of marketable grades of crude oil by 800,000 b/d in such a short period. The UN Secretary General then emerged from a meeting with Saudi King Abdullah to say that the production increase would be more like 200,000 b/d rather than 500,000.
Amidst the confusion as to what the Saudis could actually do, the oil markets entered a series of gyrations with prices flying up and down $5 or $6 a day and even briefly setting a new all time high of $138.89 earlier this week.
If the only purpose of the meeting was to celebrate the Saudis opening the taps a bit at a new oil field in response to fears that their customers will soon be priced out of the market — that would be nice. However, it seems there will be more to the meeting than an increase in oil production. The White House is already suggesting that the proper way to solve the growing world oil shortage is for the OPEC countries to stop going it alone and let the big Western oil companies with all their technology, know-how, and investment capital back into the OPEC oil fields. The implication is that a few years with Exxon in charge of the best remaining oil fields and we will be back to $2 gasoline again.
Along with the “we might increase production” message were suggestions that the Saudis plan to make their own counter-demands at the meeting. There are indications the Saudis will propose that European governments cut back on the very high fuel taxes which run $4 to $5 a gallon, but which over the years have resulted in per capita oil consumption in Europe of roughly half that of the U.S. Large tax reductions would, in theory, reduce the economic pressure on European oil consumers which could in theory help stave off a pending recession which would be nice for the economies, but would probably increase the demand for oil. This tax-cut proposal clearly would not apply to the U.S. where fuel taxes are trivial in comparison with those in most European countries.
A second concern of the Middle Eastern oil producers is the growing cost and scarcity of food. With droughts, floods and the increasing cost of fertilizer cutting world food production, a number of countries are now limiting food exports. This is a major problem for the arid Middle East which must import food for its growing populations. Then there is the effort in many countries to increase production of food-based biofuels which is seen as driving up the cost of food to unaffordable levels for many. Several wealthy Middle Eastern oil states already have begun investing in agriculture projects abroad in an effort to insure a dedicated supply of food in the years ahead.
The overall message is that oil prices, food prices, water shortages, floods and droughts are all part of one big problem that Saudi oil production alone can’t fix.
Yet another important aspect to the meeting is the Saudis desire to propound the idea that they too are not happy with what are seen as inappropriately high oil prices. Already there have been bills introduced in the U.S. Congress to punish the Saudis through embargos on U.S. military support unless they make oil cheap again. In Saudi eyes, U.S. military guarantees of their well-being is of paramount importance given the growing strength and assertiveness of their adversaries in the region and pressures to reduce the American role in Iraq.
Obviously, the issues that will be raised at the Jiddah meeting are too complex and strike too close to vital national issues to be seriously contemplated by an assemblage of 30 CEOs and 26 Energy Ministers. The Saudis, however, would like the meeting to drive home the point that even if they once had the power to control world oil prices this is no longer the case. They are doing all they can – even scraping up their last few hundred thousand barrels per day of oil production and offering it to an insatiable world demand.