VOL. XLVII
No 20
SAUDI ARABIA
Saudis Signal Change In OPEC’s Course To Meet New Realities
OPEC states face an unprecedented combination of complicating factors as they seek to formulate policy for the months ahead. Over recent months, OPEC policy has been influenced by unanimous predictions of a demand shortfall in 2Q 2004. Now, with those predictions proving to have been off-mark, Saudi Arabia has signaled its intent to change the organization’s course to confront the new realities. The challenges to OPEC are being presented by, among other factors, security fears in Iraq and other parts of the Middle East, insecurity in Nigeria, political tension in Venezuela, increasing crude demand in China, speculation and gasoline bottlenecks in the US. All these issues have contributed to a greater or lesser extent to a constant and steady rise in global oil prices over recent months.
Against this troubling background and public US pressure on OPEC, Saudi Arabia, on 10 May, decided that it was time for concerted action by OPEC. The kingdom made its intentions known through a statement issued, in the form of a brief interview, by Oil Minister Ali Naimi in which he called for the organization to raise its production ceiling by at least 1.5mn b/d to prevent high crude prices derailing global economic growth. The following is the text of Mr Naimi’s statement:
Q: Why are oil prices so high?
A: There are various causes. The most important is the market’s unwarranted fear of disruptions in supplies from some oil producing countries and regions at a time when only the kingdom and probably two or three other countries have spare production capacity. Another cause is the trend among traders and investors to purchase and maintain long-term contracts for commodities such as oil. Such a trend is a natural outcome of the robust growth of the international economy coupled with the low interest rate on deposits and bonds. In addition, the expected shortage in some types of gasoline in the US as a result of the stringent environmental regulation have aggravated the crisis and contributed to price increases both in products and crudes.
Q: Do price increases and other issues to which Your Excellency referred earlier constitute a concern to the kingdom?
A: Yes, such issues constitute a major concern to the kingdom. Therefore, we monitor the market closely, and we are in constant and intensive contact with our customers and oil importing countries. The kingdom’s policy is based on clear fundamental principles – advocating moderation in all issues, seeking the stability of the oil market through helping in achieving demand and supply balance and maintaining enough supplies to avoid prices fluctuation which might negatively affect producers, consumers and the oil industry as well. We also do not want to see prices rise to the level that they negatively affect the growth of the international economy or the demand for oil.
Q: What steps do you plan to take in this respect?
It is certain that the kingdom believes that increasing OPEC’s production ceiling is essential to keep a supply and demand balance. It is apparent that demand, especially that of Asia, has and will continue to increase in the second half of this year. We in the kingdom estimate the required increase of the ceiling should not be less than 1.5mn b/d. We will discuss the market situation in detail during the next ministerial meeting of the International Energy Forum, to be held in Amsterdam, Holland, the week after next, where I will meet the oil ministers of OPEC countries, and shall opt to reach an understanding to increase the production ceiling during the Extraordinary meeting of OPEC to be held in Beirut at the beginning of next month.
US/OPEC Relations
The Bush administration has expressed its desire to see OPEC increase output at its next meeting in Beirut on 3 June. Its message was passed on to Algeria’s Oil Minister Chakib Khelil during talks in Washington on 6 May with US Energy Secretary Spencer Abraham. “We will convey that [US message] to the meeting of OPEC,” Mr Khelil said, “and we will see how OPEC responds.” Also speaking on 6 May, US Treasury Secretary John Snow said that high oil prices were “not helpful” for US and global economic growth, adding that the Bush administration would be concerned if OPEC cut back on oil production.” For his part, Mr Khelil said that in the coming days, OPEC members would review changes in the world oil market, including stronger demand, that have been witnessed since the organization’s meeting in March at which output was cut by 1mn b/d (MEES, 5 April). Not all OPEC states were in favor of the cut. “As you know,” Mr Khelil said on 6 May, “some of our members were not necessarily agreeing with the decision that we made. Maybe they were right.”
Since the beginning of the year, OPEC’s policy has been to reduce overproduction and cut the ceiling on the basis of predictions of a 2Q surplus in world markets. But OPEC’s decision last March to ignore the market realities and cut its output ceiling seemed inexplicable, given that US oil prices were around $34-35/B at the time. Furthermore, the move prompted speculation that OPEC had a political agenda – motivated, perhaps, by the anger felt by many of its members at US policies in Iraq and elsewhere in the Middle East. Some OPEC states continue to lay the blame for high prices at the feet of the Bush administration. “Oil prices have risen to nearly $40/B because of what is happening in Iraq and the Middle East,” Venezuelan President Hugo Chavez said on 7 May. “George W Bush is to blame… not only in the Middle East, but in a fair part of the world because of his imperialist policies.”
Middle East Security Concerns
While Mr Naimi, in his 10 May statement, dismissed the market’s fear of disruptions in supplies from some oil producing countries as “unwarranted”, security concerns in the Middle East are, if nothing else, an important psychological factor that OPEC has to take into account when discussing the issue of high prices. Indeed, several OPEC members have insisted that political uncertainties in the region constitute the main factor in the price spike. “OPEC is not responsible for the high oil prices,” UAE Oil Minister ΄Ubaid al-Nasiri said on 8 May. “It is due to the tense situation in the region.” Nevertheless, he believed that “OPEC must do something” to cool prices. Qatar’s Oil Minister ΄Abd Allah al-΄Attiyah pointed to “a five-dollar political premium” in the current oil price, while Saudi Aramco President and CEO ΄Abd Allah Jum΄ah said on 10 May that “from our standpoint, geopolitics works a lot into prices.” In the view of Kuwait’s Energy Minister, the current high prices “are outside OPEC’s context.” Nevertheless, he hoped that OPEC would keep output high to keep the market in surplus.
From the perspective of traders and consumers, concerns about regional insecurity have increased after a number of incidents in which the oil sector has been the specific target of violent attacks. Hard on the heels of the suicide bombings at Iraq’s southern crude export terminals and the attack on expatriate oil sector employees in Saudi Arabia (MEES, 10 May), came the bombing on 9 May of an oil pipeline south of Basra, leading to disruptions to Iraqi oil exports from the Gulf terminals.
The threat to oil installations is not confined to Iraq. Kuwait revealed on 9 May that it had tightened security at its ports after a warning from US intelligence of possible sea-borne attacks. A Kuwaiti official said that “the Interior Ministry, in cooperation with all the agencies that work at the Kuwaiti ports, has taken full preventive precautions to boost security. They include boosting intelligence at these [port] areas and preventing boats from entering to within 5km from a Kuwaiti port.” At the same time, Saudi Aramco sought to assure the world that it had taken all possible measures to protect its staff and equipment from attack. “Our facilities are protected by technology, by physical barriers, by cameras,” Mr Jum΄ah said. “Over and above that we have the government security. In terms of the security of our people and facilities, we have not been reactive. We have always been active… We have a huge security organization in the kingdom.”
Limited Room For Action
While leading members of OPEC have indicated that steps should be taken to cool prices, their room for action is limited. Member states are already producing over their quotas and spare capacity within the organization is minimal when Saudi Arabia is taken out of the equation. With rising Asian and US demand continuing to absorb OPEC’s over-production, prices can only come down gradually and over time. Added to which there is the unknown and unpredictable influence of political and security developments in the Middle East and elsewhere. Everything that has happened in Iraq in recent days – including the allegations of prisoner abuse by coalition forces and the decapitation of a US hostage – points to tension in the region as a whole rising rather than falling. While fears of major crude supply disruptions may be unwarranted, the perceived threat to security looks like being as strong an influence as ever on the factors that are keeping prices at their record levels.