The Precipitous Rise of Oil Prices

Bush administration policy planners are projecting the price of oil will soar to $80 per barrel or more as summer approaches its end. They see only one force able to moderate this spike: Saudi Arabia. If King Abdullah were to agree to expanded sustained capacity, which now stands at 2,1 million barrels a day, they say, world markets would take this to indicate that the Saudis could quickly pump additional supplies to the market within a month or two of an unexpected crisis erupting. This message would temper demand and stabilize price levels.

DEBKA-Net-Weekly‘s Gulf sources report that US Vice President Dick Cheney tried his hand at persuading the Saudi king to play ball during his visit to Riyadh last May. However, the monarch stuck to his guns and refused to go beyond this figure.

Aside from oil issues, Saudi-US relations are troubled by divergent views on Iraq and the Palestinians. Riyadh is therefore reluctant to be overly dependent on Washington on any issue and less inclined to be responsive on the sticky matter of energy prices as well.

For now, the Saudis produce nine million barrels of oil a day, within the quota assigned by OPEC. This falls short of its capacity of 11 million bpd, which will rise to 12 million bpd in 2009. This higher capacity was agreed when King Abdullah visited President George W. Bush at his Texan ranch in Crawford in 2005.

In the 1970s, before Aramco’s US partners sold out to the Saudi government, the company planned to raise output to 14 million barrels a day with the approval of the government in Riyadh. It then cut back on this objective for lack of investment opportunities in world economies for the surplus petro-dollars.

The leading opponent of expanded production then as today was the king-to-be Prince Abdullah.

Over and above its standing as the world’s biggest oil producer, Saudi rulers value the kingdom’s role as an important stabilizer of the international oil market and its prices. This function depends on its permanent sustained capacity. The Saudi government has therefore preserved its 2.1 million pbd level jealously for three decades.

Who’s to blame for soaring prices?

The levels of production and of sustained capacity are only two of the basic determinants of oil prices on the world markets. Another key element is refining capacity, which in the last thirty years has fallen sharply behind world needs, especially in relation to China, South Korea and Taiwan.

Not a single refinery has been built in the United Sates in fifteen years. Saudi’s Ras Tanura refinery has never been expanded beyond the 500,000 bpd limit planned when it was built thirty years ago.

Investors in expanding refinery capacity are inhibited by the hefty amounts required and the lean returns during years of shrinking consumption which recur in an unpredictable market. Developed countries have also been constrained from building refineries by excessive air pollution. Therefore, even if a crash program of refinery construction were to be initiated today, it would have little effect on currently soaring oil prices.

The question of who is responsible for the skyrocketing world oil prices has been at issue since 2004 between OPEC, as representative of many producers and western consumers, led by the United States. OPEC and it leading member Saudi Arabia insist that the shortage of refining capacity is the bottleneck which puts prices up and blame America for failing to build additional refineries.

The United States, for its part, accuses the oil suppliers of holding down the output of crude, implying that the Saudis are at fault for refusing to draw on their sustained capacity to enlarge supply.

The independent oil experts consulted by DEBKA-Net-Weekly confirm these basic causes of the price spike, but above all point the finger at two key determinants: the oil policies of the Saudi and American governments.

Today as yesterday, Abdullah stands by his refusal to permit the controlled expansion of the kingdom’s capacity beyond the real needs of the market. He prefers to leave the oil underground, a policy which constantly prods prices upward. The beneficiaries are the big oil companies which own refineries.

In the case of US government policy, President Bush as a Texan is often charged with preferring local oil companies over national interests. High oil prices undeniably favor the former.