Saudi Oil Conference - Part 2

We all know that King Abdullah wears long flowing robes. What we don’t know is what he’s got up his sleeves.

Clearly the King wants to lower the price of oil, as discussed in my prior post. How will he do it? We know from the market’s action this week that it would be beyond stupid for the King to do no more on Sunday than announce another 200 kb/d of Saudi production, as has already been signaled to the market. In terms of Saudi production, the King will need to commit to sell as much of the new 1.7 mb/d of light oil from their two new fields, Khurais, and Khursaniyah, as is needed to reduce the price of oil “substantially”. I doubt the King will posit a target price.

But we know that if the Saudis were to use all their spare capacity in an effort to reduce prices, its efforts would be unlikely to succeed. For one thing, other exporting countries might well try to counter it by withholding more of their oil. For another, if all the Kingdom’s spare capacity was used to reduce the price of oil…there would no longer be any spare capacity! That would spook the market and the price of oil would actually go up. Finally, within a year or so of the additional Saudi crude coming on the market, declining fields and new demand would still cause the price to rise. Therefore, to bring down the price, the King will need to announce or propose something beyond just what the Saudis themselves can do.

My favorite candidates for potentially effective longer term action to moderate the oil price would be the establishment of an international task force to work on increasing output from Nigeria and Iraq. Why? First, the only real potential near term upside for oil production is in those countries, each of which could add perhaps 2 mb/d to output in fairly short order if the above ground conditions allowed it. Second, I think both countries’ leaders would like such an effort to succeed. So maybe the King will suggest formation of two task forces composed of the Energy Secretaries from the U.S., Russia, E.U, and China plus local representatives of various factions of each country such as, in Nigeria, the Nigerian Energy Secretary, a person from the guerilla group MEND, executives of the oil companies, and the governor of the Nigerian Delta.

The idea is that the task force would bring international pressure and expertise to bear on all sides and viewpoints continuously until a solution is reached. If need be, the task force could arrange for U.N. troops to keep the peace that is negotiated. In sum, the King would be asking that we all recognize the global imperative to get the world’s oil out of the ground faster in the near term or face economic collapse.

The King could not get all this done by himself, but I think the King’s conference has been set up in collaboration with the White House and some other G-8s. That suspicion was reinforced this morning by W’s personally “announcing” to the press his desire for Congress to authorize off-coast drilling. It looked like an innocent enough announcement of a position the President is well known to have held for a long time (rumor is they were the first words out of his mouth as a child), but his press announcement so close to Sunday’s meeting and in the absence of any near term potential for Congressional action on the subject may have been intended primarily as a message of encouragement to the King that “we’re working with you.”

I understand that the above idea positions me dangerously close to the “naive idealist” viewpoint. I’m even willing to agree that my being right about this is a way long shot. But it seems clear to me that if the King calls a big meeting to lower the price of oil and in the end he does not present a truly compelling set of reasons for oil traders to believe that the price should be lower, then the price will probably skyrocket instead. And that would be somewhat of an embarrassment to the King, I would think. So it seems impossible to believe that the King doesn’t have something really big up his sleeve.

My own preference would be for someone in authority somewhere to pound the table for a rapid transition to electric cars, hybrid trucks, and more public transportation throughout the world. But somehow I doubt that will come from King Abdullah.

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Comment by rayson

2008-06-19 18:24:50

Good post Jim.

I also think there should be a greater push for hybrid cars and for technology to expand along that line.

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