June 14, 2008
Plan Would Lift Saudi Oil Output to Highest Ever
By JAD MOUAWAD
Saudi Arabia, the world’s biggest oil exporter, is planning to increase its
output next month by about a half-million barrels a day, according to analysts
and oil traders who have been briefed by Saudi officials.
The increase could bring Saudi output to a production level of 10 million
barrels a day, which, if sustained, would be the kingdom’s highest ever. The
move was seen as a sign that the Saudis are becoming increasingly nervous about
both the political and economic effect of high oil prices. In recent weeks,
soaring fuel costs have incited demonstrations and protests from Italy to
Indonesia.
Saudi Arabia is currently pumping 9.45 million barrels a day, which is an
increase of about 300,000 barrels from last month.
While they are reaping record profits, the Saudis are concerned that today’s
record prices might eventually damp economic growth and lead to lower oil
demand, as is already happening in the United States and other developed
countries. The current prices are also making alternative fuels more viable,
threatening the long-term prospects of the oil-based economy.
President Bush visited Saudi Arabia twice this year, pleading with King
Abdullah to step up production. While the Saudis resisted the calls then,
arguing that the markets were well supplied, they seem to have since concluded
that they needed to disrupt the momentum that has been building in commodity
markets, sending prices higher.
The Saudi plans were disclosed in interviews with several oil traders and
analysts who said that Saudi oil officials had privately conveyed their
production plans recently to some traders and companies in the United States.
The analysts declined to be identified so as not to be cut off from future
information from the Saudis.
Last week, King Abdullah also took the unprecedented step of arranging on short
notice a major gathering of oil producers and consumers to address the causes
of the price rally. The meeting will be held on June 22 in the Red Sea town of
Jeddah.
Oil prices have gained 40 percent this year, rising to nearly $140 a barrel in
recent days and driving gasoline costs above $4 a gallon. Some analysts have
predicted that prices could reach $200 a barrel this year as oil consumption
continues to rise rapidly while supplies lag.
The growing volatility of the markets, including a record one-day gain of
$10.75 a barrel last week, has persuaded the Saudis that they need to step in,
analysts said.
Tony Fratto, a White House spokesman, said, “We would welcome any and all
increases in oil production, including from Saudi Arabia.”
But the measure carries some risks to the kingdom and is not guaranteed to
bring down prices, analysts said. Some investors doubt that Saudi Arabia has
the capacity to increase its production beyond its current levels.
“This clearly represents the biggest test for them,” said John Kilduff, a
senior vice president at the brokerage firm MF Global, who said the move could
backfire if investors failed to respond to the extra Saudi supplies. No other
producer has the capacity to quickly expand production.
Oil prices fell on Friday, slipping $1.88 to settle at $134.86 a barrel on the
New York Mercantile Exchange, after reports of the prospective Saudi increase
trickled into the market.
Ibrahim al-Muhanna, an adviser at the Saudi petroleum ministry, declined to
comment on the production increase but said that Saudi Arabia was uncomfortable
with oil prices. “Our goal is to bring back stability to the oil market,” he
said.
Consumers are complaining that rising fuel prices are imposing a growing toll
on their economies, and contributing to higher food costs. The Australian prime
minister, Kevin Rudd, said this month that it was time “to apply the blowtorch
to the OPEC organization.”
In Washington, bipartisan support is also growing to pass a law allowing the
Justice Department to engage in antitrust proceedings against OPEC producers
accused of curbing supplies to drive up prices.
Pressure is also mounting in consuming countries to address record energy
prices. Congress is debating measures that would tackle speculators, whom many
in Washington blame for driving up commodity prices.
When the Organization of the Petroleum Exporting Countries, of which Saudi
Arabia is the most powerful member, met in March, it decided against increasing
production, blaming speculators and a declining dollar, not a shortfall in
supplies, for driving up oil prices.
Saudi Arabia’s unilateral policy could put it at odds with other members of the
OPEC cartel. In a report from the group’s secretariat on Friday, OPEC analysts
said they saw no need to put more oil on the market. “Claims that the recent
surge in prices is due to a supply shortage are unjustified,” the report said.
Saudi Arabia is completing a huge expansion program in its oil industry that is
expected to bring its production capacity to 12.5 million barrels a day by
2009. As part of that expansion, Saudi Aramco, the country’s national oil
company, is planning to start soon an oil field, called Khursaniyah, with a
daily production rate of 500,000 barrels.
The production increase, which would amount to less than 1 percent of global
consumption, could be made public next week at the energy meeting, which is
expected to bring together a large number of consuming and producing countries,
including the United States, Russia, Britain, China, India and Japan.
While the meeting is not expected to achieve anything tangible, Saudi officials
hope that tackling the issue publicly will break the upward momentum that is
dominating oil markets.
“They’ve created pressure on themselves to make a concrete move at this
meeting,” said Adam Robinson, an analyst at Lehman Brothers. “But when the king
calls an oil summit, the markets would do well to take heed.”
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