Riyadh cannot control oil price

27 June 2008
The separation of the price of oil and the fundamentals of supply and demand is increasingly obvious.

When Saudi Arabia’s King Abdullah announced at the international oil meeting in Jeddah on 22 June that the cornerstone of attempts to curb increasing oil prices should be “co-operation”, he was not just passing the buck.

In recent months, the clamour from oil-consuming nations for Riyadh to increase its oil production has grown ever louder. But the kingdom has far less influence over prices than many outside believe.

The separation of the price of oil and the fundamentals of supply and demand is increasingly obvious. When Riyadh said in mid-June that it would raise production by 200,000 barrels a day (b/d), oil prices hit $139.89, setting a new record high.

Riyadh cannot control rising demand or the level of production elsewhere. China’s demand for crude is rising by 25 per cent a year, while Russian production is falling and Nigeria’s oil output is at its lowest for a generation.

Its lack of control over prices creates a longer-term problem for Riyadh, as high prices push oil consumers towards alternative energy sources.

The candidates in the US presidential race are trying to outdo each other in their proposals to ‘solve’ the energy crisis. On 25 June, Republican nominee John McCain said he would spend $30bn on clean coal and build 45 nuclear reactors.

Keen to avoid a shift away from oil, Riyadh is at pains to convince consumers that it is doing all it can to moderate the market.

After the Jeddah conference, it took journalists on a site visit to the Khurais oil field, which from 2009 will provide an additional 1.2 million b/d. Even that is starting to look insufficient, but unfortunately for Riyadh and its customers, there is little else it can do.

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