Saudi Arabia calls for OPEC members to increase output to cap oil prices. Sherine Abdel-Razek analyses whether or not this measure will work The price of future oil contracts resumed its upward trend yesterday following a short-lived ease as the market was analysing the impact of Saudi Arabia's promise to increase its oil output. The kingdom, the world's largest oil exporter, also called for increased production quotas from Opec. The price of US crude oil rose to $41.40 a barrel, less than 40 cents away from last week's 21 year highs for future contracts. This is compared to $41.14 on Tuesday. Saudi's move stirred a wave of public reservations of other Opec members that believe that the recent price hikes are not based on a supply shortage and thus more oil will not lower the price. A day before Opec members met informally in Amsterdam on the Margin of a conference organised by the International Energy Agency (IEA), the energy watchdog of the Organisation for Economic Cooperation and Development, Saudi Arabia said that the Opec should increase production by two million barrels a day pointing out that it was ready to pump an extra of 800,000 barrels a day to cap the increase in future contracts prices. An OPEC statement issued during the conference expressed "deep concern" with oil prices, adding that the cartel wanted to cut fuel costs in support of the world economy. OPEC President Purnomo Yusgiantoro said no decision was made during informal talks in Amsterdam on whether the organisation would increase crude oil supplies. OPEC will set out its policy in Beirut on 3 June, he added. While the Saudi statement calmed prices down during this week's early trading, other OPEC member states showed that they are not convinced with the viability of the Saudi plan. "The market is already sufficiently supplied with oil," Rafael Ramirez, energy minister of Venezuela, told reporters during the IEA conference. Instead, he cited high taxes, particularly in the United States and Europe, and unrest in Iraq for the hike in prices. This came only two days after Iraq's oil minister, Ibrahim Bahr Al-Uloum, issued similar statements attributing the soar in oil prices to many factors besides OPEC production levels, including traders' speculation. Meanwhile, the Libyan reaction was anything but muted. "Saudi Arabia can't decide alone to increase production," Libya's oil minister, Fathi Bin Shatwan, said during Sunday's conference. However, traders and market analysts are unsurprised that Saudi Arabia has taken its decision alone, believing that most OPEC members will eventually follow suit. Despite being the largest oil producer -- thus reaping the greatest benefit from the price soar -- Saudi Arabia's political and economic interests are dependent on capping oil prices. "If the prices remain that high, consumers might start looking for cheaper energy sources in the future and [Saudi Arabia] might jeopardise demand on its oil reserves. The US is already expanding by using more environment-friendly fuel cells instead of oil," said Amr Hamouda, head of Al-Fostat Centre, a private centre for economic and development studies. Moreover, Hamouda believes that the kingdom is under a lot of pressure, given the demands of its complex international political interests, which deprive it from gaining the diplomatic leverage to govern its economic interests. Robert Mabro, president of the Oxford Institute for Energy studies in the United Kingdom, agrees, saying the anti-Saudi campaign in the US, catalysed by the 11 September 2001 attacks, constituted one of the main causes of the oil price hikes. Meanwhile, the kingdom itself has already proven vulnerable as a target for terrorist attacks, lately on oil production installations. White House spokesman Scott McCellan said last week that the US president "remains concerned" about rising petrol prices, and that the US has been lobbying oil producers "not to act in a way that would harm [America's] economy". The kingdom has produced oil at its full capacity of approximately 10 million barrels per day only twice: during the 1991 Gulf war and during last year's US-led invasion of Iraq. According to analysts, not only is Saudi Arabia willing to react, it is about the only country that can act. "Having the lion's share of the world oil reserves and the least drilling costs, in addition to the refining capacity, Saudi Arabia is about the only OPEC or non-OPEC member with spare capacity and can thus supply the market with more oil," said Mabro. According to IEA, other OPEC members are currently pumping oil at 90 to 95 per cent of their capacity. Venezuelan production was hard hit in 2002 by an attempted coup, and again late last year by the sabotage of some of its fields. Iraqi oil exports totalled less than the expected amount following interference by the US and other OPEC members. As for non-OPEC members, there is a decline in production in the oil fields of Alaska and the North Sea. Currently, the US, Britain and Norway are recording low levels of production. The IEA and OPEC are forecasting declining output from non- OPEC producers in the Middle East like Oman, Syria and Yemen, as well as in Asia. The only areas where non-OPEC output is set to rise this year is in Angola, Chad, Sudan, Russia and Kazakhstan, most of which are suffering from political instability to varying degrees. Both Hamouda and Mabro say other OPEC members will agree to lift the ceiling on production, while Saudi Arabia will pump most of the extra supply. But would such a measure curb price hikes? "Deciding to increase production will not mean that they are pumping more oil ... They are just sending signals to the market to ease things," said Mabro, who expects this move to result in a temporary decrease in oil prices. He explained that oil prices are not now determined by OPEC policies, as was the case in the 1970s and 1980s. Now, it is traders' expectations of political and economic developments that are reflected in future contract prices. "This time traders in the futures and options markets have anticipated a tighter market by bidding up forward prices. So it is not the OPEC move that will decrease prices, it is the indication it gives to those traders," said Mabrow. Also, market experts rule out any significant decrease in prices even if OPEC increased its quotas, as member countries are already exceeding the official quota of 23.5 million barrels a day by an estimated 2.2 million barrels, according to Reuters. The only way out of this lies in the hands of the US, said Mabro. First, it needs to increase the capacity of gasoline refineries as the bottlenecks in these refineries are blamed for the increase in gasoline prices, and indirectly in oil prices. American gasoline refineries consume 11 per cent of the world's oil production. Mabro also opined the US needs to change its policy in the Middle East. "Being the main source of oil, the region's stability is crucial to ensure a stable oil market," he said.
