Speculators Wage War on Bush-Abdullah Oil Accord

Oil prices nudged very close to $60 per barrel this week, sparking a fresh world price panic. It only just beat the last record. Not so long ago, in April, oil soared to $58 shortly before President George W. Bush received Saudi Crown Prince Abdullah at his Crawford ranch. But then, the summit’s calming effect (See DEBKA-Net-Weekly 207 of May 27) brought prices down in May to a moderate $47-48 per barrel.

DEBKA-Net-Weekly‘s oil industry analyst suggests that there are many obvious rationalizations for the volatility of oil prices. Most are true, but they also evade its real, underlying cause

The latest surge of June may well have reflected unrest in Nigeria in the wake of Al Qaeda’s threat to strike at Western interests in the country; the US and other western missions in Lagos shut their doors abruptly last Friday June 17. Four days later, on the day they reopened for business, oil peaked.

The soaring price also reflected a tight market, a lack of faith in the ability of the Oil Producing Countries of OPEC to meet rising world energy demands – despite their mid-June commitment to lift production by half a million barrels a day. Cartel members (who account for 35% of world oil production) complained they were already producing 28 million barrels a day – 30 million if Iraq’s output is counted in.

It is certainly true that OPEC members, while willing to increase production, are not able to preserve more than 2 million barrels a day of spare capacity. This means they lack the resources for applying brakes should some unforeseen political crisis in an oil-producing country tip the market over into hysteria.

The Saudis also make a valid point when they point to inadequate refinery capacity as keeping the world short and therefore acting as a price booster.

But, beyond all these pressures, DEBKA-Net-Weekly’s analyst diagnoses the primary trigger as being the race among a powerful group of oil brokers for speculative profits. This group has virtually declared war on the world oil policy consensus, including a $45 price level, set forth by President Bush and Prince Abdullah.

Twin motives: profiteering and undermining US-Saud dominance

OPEC members lined up behind the agreed price – as did BP president Sir John Browne and other prime movers of the oil industry. He forecast $45-50 as the rate he believed would prevail in the next three years, an important endorsement of the Crawford accord. More support came from Russian president Vladimir Putin. He maintained that overly high prices rises would be detrimental to inflation in Russia.

But not all the interested parties in the energy world lined up behind the American-Saudi lead. Mexican president Vincent Fox, for instance, came out this week against any ceiling at all on oil prices. Good prices, he said, were a shot in the arm for economic growth.

Mexico, albeit an important voice in the oil industry, does not have enough clout to push prices up to new records.

DEBKA-Net-Weekly‘s oil market analyst says the oil brokers do. And those invested heavily in oil stand to increase the value of their oil investments manifold when prices shoot up. The spike also offers them an opportunity to test the potential outer limits of prices for the future.

These investors therefore speculated on the tight market, the insufficiency of OPEC spare capacity, the three-to-four year time lag for Abdullah to make good on his promise to Bush to raise production capacity to 12.5 million per day, as well as a similar delay for the development of new oil fields.

For good measure, these interested speculators this week cast grave doubts on the credibility of OPEC’s offer to raise output and cool prices. They also disseminated a price forecast of $90, which they based on the 1980 spike sparked by the Khomeini revolution in Iran and computed on the basis of the dollar’s decline in value since then. The price did indeed shoot up at the time to $35-38 – and briefly to $40, before dropping back to its previous level.

The oil brokers are expected to continue to fight the optimum price the Bush-Abdullah understandings laid down. Pricing moderation will remain under dissident attack out of different motives. Some political opponents will seek to topple US-Saudi dominance over the shaping of world oil policy and defy their agreement to adjust oil prices to dollar inflation in the last 25 years. Others, impelled by the profit motive, will continue to manipulate rising prices in order boost their speculative gains.