Jeddah meeting tackles oil rage

Tom Ashby and Caryle Murphy

• Last Updated: June 22. 2008 12:55AM UAE / June 21. 2008 8:55PM GMT

King Abdullah of Saudi Arabia has called the energy summit to iron out disagreements over what is causing the surge in oil prices. AFP

JEDDAH // At an emergency oil summit in Jeddah, Saudi Arabia is seeking to defuse a political backlash against oil exporting nations from consumers upset at skyrocketing prices.

Oil's surge to a record US$140 (Dh514) a barrel has created an unprecedented windfall in the Gulf, but sparked street protests in places as diverse as Spain, Nepal, Indonesia and Egypt. Americans are furious about pump prices at $4 a gallon, airlines are imposing fuel surcharges and many of the world's poorest are replacing kerosene with firewood for cooking.

King Abdullah of Saudi Arabia called the summit to iron out disagreements over what is causing the oil price surge, a phenomenon that has confounded easy explanation.

The US and Britain have blamed a lack of oil supply, while oil producers including Saudi Arabia have highlighted the growing presence of speculators in futures markets, where oil prices are set.

The kingdom, which is the only oil producing nation with enough capacity to significantly raise production, is under intense pressure from Western governments, including its major ally, Washington, to open its spigots and bring prices down.

But Saudi Arabia has argued that it is meeting the demand for oil and that extra barrels would simply end up swelling inventories in consuming nations.

The fear among politicians on both sides of the global oil trade is that this year's 30 per cent jump in oil prices could hasten a global recession which spares nobody.

"A lot of people are feeling the pain. This is an effort to deflect the claim that it is purely a production issue," said Raad Alkadiri, an oil market analyst at PFC Energy, a Washington-based consultancy.

"Saudi Arabia wants an end to the blame game, an acknowledgement of the complex elements driving oil prices and a determination to deal with the real issues," he added.

The Jeddah summit is expected to produce a list of recommendations by both oil producing and consuming nations aimed at taming fly-away prices.

But analysts say there will be no quick fix for the coincidence of factors that are producing a near-perfect storm in the oil market. Few are expecting an immediate drop in prices.

Anger at high oil prices has led to moves in the US congress, so far unsuccessful, to force Saudi Arabia's hand. These have included a proposal to halt a major US arms sale package to Riyadh and draft legislation to allow US prosecutors to charge Opec with anti-trust violations.

Gulf states seeking to invest their oil windfall in the US have also suffered from rising protectionism in Washington, as in the case of the failed takeover of six US ports by DP World of Dubai in 2006.

The rhetoric reached a new low when Kevin Rudd, the prime minister of Australia, suggested that the forthcoming G8 summit in Japan would be an opportunity to "apply the blowtorch" to Opec over oil supply.

Major oil exporters insist that they are meeting demand and have enough left in the ground to pump more if required. Instead, they argue that prices are being driven artificially high by investors who have moved from the now defunct US subprime mortgage market into unregulated speculation in oil futures.

Other factors in oil's march higher include the weakness of the US dollar, in which oil is priced. A shortage of refineries is also boosting pump prices, while consumer taxes and subsidies have interfered in the free operation of the world oil market.

Gordon Brown, the British prime minister, Xi Jinping, the vice president of China, and Sam Bodman, the US energy secretary, are among officials from 38 countries attending the summit. They are joined by executives from about 30 major energy companies, representatives of several international energy organisations, as well as officials from Opec.

King Abdullah is scheduled to address the assembly, followed by Mr Brown. "The point is not to blame, but rather to get them all together and try to solve the problem," said one Saudi official.

After months of dismissing requests from US and other officials to increase output, Riyadh broke the deadlock in May - during a visit to Saudi by President George W Bush - with the announcement that it would increase production by 300,000 barrels a day.

That was followed by a pledge this month to bring on a further 200,000 barrels a day in July, bringing its daily output to 9.7 million barrels.

These increases, plus plans to begin drawing from its Khursaniyah oil field, which will eventually produce 500,000 barrels a day, will put Saudi daily capacity at 12.5 million barrels by the end of next year.

In yet another move to satisfy consumers, Saudi Arabia could use the Jeddah meeting to shed more light on its expansion plans after next year, analysts said.

At the same time, Western regulators are strengthening controls on oil futures trading. US regulators have announced plans to impose trading limits on a London-based contract in the US benchmark crude oil, West Texas Intermediate.

The Jeddah communiqué is expected to call for more information on the activities of "index funds" and their motives for investing in oil futures.

On June 6, for example, US oil futures rose $11 on one day, just days after Saudi Arabia announced its increased output.

Saudi Arabia does not mind fluctuations in price, especially if they point gradually upward, officials say. What it dislikes, however, is wild swings that bring uncertainty to the market and the eventual prospect of a major downward correction.

What Saudi officials most fear, say observers, is a severe drop in oil prices that would throw its ambitious development projects, including the building of six new cities, into disarray.

It was only 10 years ago that the Saudis were in dire economic straits. Oil was then $10 a barrel and the kingdom's debts were the equivalent of 130 per cent of its GDP, mostly because it had financed the $60 billion-plus cost of the 1990-91 Gulf War to eject Saddam Hussein from Kuwait.

Despite the huge profits they are reaping now, the Saudis see the current surge in price as perilous to their long-term interests. They fear that long-lasting high prices will not only sour political ties with important allies like the US, but also will lead consumer countries to get serious about developing alternative fuels.

The Saudis want the price of oil to return to a sustainable level. But they will be wary of flooding the world market in oil, a move that could cause an excessive buildup of inventories in consuming countries and become cause for speculators to dump futures, hastening another price crash.

tashby@thenational.ae