Global hardships, strikes, and other unrest over prices led to Saudi Arabia's meeting of oil VIPs set for June 22. But it's not clear what can be done

by Stanley Reed

Worried about a potential political backlash from oil that is trading at over $130 per barrel, the Saudis are ratcheting up their effort to cool things down.

The Saudis have promised an additional 300,000 barrels a day of supply beginning this month. That would bring their daily output to 9.45 million barrels. They have also called a meeting for June 22 in Jeddah, Saudi Arabia, to discuss the situation. Various energy ministers—including the U.S. Energy Secretary Samuel Bodman—oil company chiefs, and financiers are expected to attend. In a sign of the importance the Saudis attach to the meeting, King Abdullah will preside. "When you see the increase in price and these gyrations—$11 per barrel in one day—this is unacceptable to us," Ibrahim al-Muhanna, the Saudi oil ministry spokesman, told MEES, the trade journal. "This could hurt the global economy and even the long-term interest in oil."

Those are strong statements from a Saudi official. David Kirsch, an analyst at consultants PFC Energy in Washington, says the Saudis are concerned about the political ramifications of high prices when it comes to their key customers in the U.S. and in Asia. They worry that this bout of price hikes could lead to the U.S. Congress taking drastic measures. They are also worried high prices could hurt their ambitions to build refineries and distribution networks in fast-growing Asia. "The Saudis don't want to be seen as a scapegoat if the world economy goes into recession," Kirsch says.

RUMORS OF INCREASED PRODUCTION
The Saudis are keeping mum about what if anything they plan to propose at the meeting. They are skeptical of adding even more oil to the market because, according to Kirsch, they aren't having an easy time finding customers for the extra 300,000 barrels. Also, many refiners take the same amount of Saudi crude each month regardless of pricing because they don't want to alter their refinery configurations. Moreover, much of Saudi spare capacity is heavy crude that many refineries don't want.

However, there are unconfirmed market rumors that the Saudis may increase production to 10 million barrels per day. This would show skeptics that they have the goods—i.e., oil—to control prices when they want to. Of course from the Saudi and OPEC point of view there is a danger that drastic Saudi action would trigger a price cut.

There are signs that high prices and volatility could be setting the stage for a correction. Europe has been hit with unrest over fuel costs, including strikes by truckers and fishermen. Costly fuel is crimping the economies of many developing countries and creating hardships. High prices are also starting to curb demand for oil. The International Energy Agency in its latest monthly report predicted a sharp 500,000 barrel-per-day drop in oil consumption in North America as drivers cut their mileage.

FOCUSED ON POTENTIAL SHORTAGES
But whether the fall in demand in the industrialized West will be enough to spark a market correction soon is still unclear. Demand remains strong in China and some emerging markets, including most OPEC countries, where fuel is subsidized and consumers are shielded from price rises.

So far the market has largely shrugged off the mounting evidence of falling demand and chosen to focus on potential shortages caused by everything from strikes in Nigeria, to Israeli threats to bomb Iran, to the hurricane season on the U.S. Gulf coast.

In addition, with world markets volatile, prices are being influenced by a wide range of factors that extend well beyond fundamentals. For instance, the weak dollar and increasing concerns about inflation are creating upward pressures on oil. That relationship was shown clearly when European Central Bank President Jean-Claude Trichet suggested on June 5 that he might raise interest rates. As much as anything, it was those comments that ignited the surge of oil prices to just under $140 per barrel on June 6.

Trichet was trying to curb inflation expectations. But by talking about raising rates, he wound up in the short term doing just the opposite. His comments weakened the dollar, boosting oil prices. This little episode shows how difficult it will be for the Saudis—or anyone—to bring prices down.