RIYADH, June 7: With oil approaching $140 a barrel and Morgan Stanley projecting it to cross even the $150 mark by July 4, the perception gap between the haves and the have-nots of the energy world is getting scary -- with serious geo-political implications indeed.
When President Bush visited Riyadh in mid-May, the message was clear enough. He used all at his disposal to push Riyadh to open up the taps. And the president was soon followed by his Treasury Secretary Henry Paulson, apparently to follow up on the discussion the president and his team had with the Saudi leadership on all issues - oil included.
Secretary Paulson had a point to make. ‘The key message the secretary will highlight is that record high oil prices are putting a significant burden on the global economy, they are also putting a significant burden on families and consumers, not just in the United States but around the world,’ David McCormick, Treasury Undersecretary for International Affairs, told reporters just ahead of Paulson’s first trip to the region as Treasury chief.
And though Saudi Arabia announced increasing output by 300, 000 bpd (3.3 per cent), it made clear increasing the output was no answer to the woes of the markets. ‘Oil can’t be sold, just to be stored at sea,’ the Saudi foreign minister was later quoted as saying. The wedge on the issue stood more exposed.
Further, the Saudi Petroleum minister while briefing the Saudi cabinet after Bush departed from Riyadh, reiterating the Saudi view point said “the currently produced quantities meet all needs of the market and that the production capacity can meet any real additional energy needs.”
Opec appears determined not to bend to demands that it produce more to dampen the red-hot market. Opec president Chakib Khelil earlier the week blamed speculators for the steep rise in oil prices, insisting that supply was not a problem. “There is no problem of supply, the problem is much more linked to speculation,” he told a press conference with visiting French ecology and energy minister Jean-Louis Borloo.
He also said the price of oil was closely linked to the exchange rate of the US dollar, which has fallen steeply against other major currencies. Khelil, who is also the Algerian energy minister, had made similar remarks on Monday in an interview with Spanish national radio. “If Opec decides to raise production ... these hikes will not really lower the price,” he said then.
There was no lack of supply, and no consumers struggling to find gasoline at gas stations, insisted Opec’s head of research Hasan Qabazard last week. He also reiterated, there was no need for Opec to boost output this year as stocks were already building up with oil production outstripping demand by 800,000 bpd to one million bpd in the second quarter of this year.
“This year there is more production than demand,” Qabazard said. “With the 300,000 bpd from Saudi, stocks should build even more”.
He estimated that the average daily addition in stocks for the whole year, including the increased Saudi output, would come to around 500,000 bpd. Further, Opec was in the midst of $160 billion of projects that would help take the group’s capacity to more than 40 million bpd in 2012-2013, up from around 34-35 million bpd now, he said.
Yet, Opec is fast becoming the target. In the US, a Congress resolution blocking an otherwise normal arms sale to Saudi Arabia was moved, unless the Kingdom signalled raising production by some one million barrels per day. And then in an additional move, some Congressmen tried to bring anti trust lawsuit against Opec for collective action. Stakes are getting higher.
The open season seems now having spread to the UK too, where the British Prime Minister Gordon Brown also appeared aiming squarely at Opec. “It is, as people will recognise, a scandal that 40 per cent of the oil is controlled by Opec, that their decisions can restrict the supply of oil to the rest of the world, and that at a time when oil is desperately needed and supply needs to expand, that Opec can withhold supply from the market.”
Sadad Al-Husseini a former senior Saudi Aramco executive, now alleges that some oil-producing countries are inflating the size of their oil reserves by as much as 300 billion barrels by padding supposedly proven reserves with “probable” reserves and tar and oil sands
Oil producers, according to Husseini, are also overly optimistic about new extraction techniques. They presume they’ll work well everywhere, instead of analysing their usefulness field by field.
In the meantime, the IEA is looking closely at the global scenario. “We are entering a new world energy order,” the IEA Chief Economist Fatih Birol says. The Wall Street Journal reported that the IEA was also planning to lower its forecast for long-term world supply.