United for Peace of Pierce County, WA - We nonviolently oppose the reliance on unilateral military actions rather than cooperative diplomacy.

After a visit from U.S. President George W. Bush to King Abdullah in Riyadh on Friday, Saudi Arabia said on May 16 that it would increase output by about 300,000 barrels a day, "increasing its oil production to its highest level in two years," the Financial Times reported late Friday.[1] -- "Riyadh pointedly waited until Mr. Bush had left the meeting before it made the announcement — leaving U.S. officials in the embarrassing position of having already briefed reporters not to expect any movement from the Saudis," Javier Blas noted. -- On Friday the price of crude oil futures set another new record of $127.82 a barrel. -- A separate Financial Times piece posted a few hours later set the decision in the context of OPEC politics, and said Saudi Arabia's decision "threatens to deepen the rift that has emerged inside OPEC between the moderate Arab Gulf countries and hawkish Iran and Venezuela."[2] -- In a review of the spike in energy prices, Financial Times columnist Martin Wolf, the paper's chief economics commentator, urged a market-based argument for structural global adjustment and against the complacent view that the price of oil will soon decline: "On balance, it is quite unlikely that aggregate demand for oil will collapse, as it did after the two previous price spikes, just as it is unlikely that massive net new oil supplies will come on stream in the near future. This does not mean that prices will remain as high as they are today for the indefinite future: such stability is improbable. But it means we should expect a sustained period of relatively high prices even if “peak oil” theorists are proved wrong. If proved right, this would be true in spades. . . . The great event of our era is the spread of industrialization to billions of people. The high prices of resources are the market’s response to this transforming event. The market is saying that we must use more wisely resources that have now become more valuable. The market is right." ...

LONDON -- Saudi Arabia said on Friday that it was increasing its oil production to its highest level in two years, bowing to intense U.S. pressure after the price surged to a fresh record of almost $128 a barrel.

The announcement of a boost to output by about 300,000 barrels a day came after a plea by George W. Bush, U.S. president, to King Abdullah of Saudi Arabia in Riyadh.

The kingdom’s oil output would hit 9.45m b/d by June, Ali Naimi, the country’s oil minister, said after the meeting. Saudi Arabia last produced at that level in March 2006. It said the move was needed to compensate for lower output from other countries in OPEC.

The jump in oil prices came after an extremely bullish forecast by Goldman Sachs and fears that China will need to step up fuel consumption after this week’s earthquake damaged its hydro-electric power plants.

The Wall Street bank -- one of the most influential voices in the oil market -- forecast that prices would average $141 a barrel in the second half of the year.

U.S. crude oil futures hit a record high of $127.82 a barrel, up nearly $3.70 on the day. But the Saudi announcement immediately sent the price down to settle at $126.29 a barrel.

The surge in prices had earlier caused the first fissures within OPEC as Ecuador, the group’s newest member and smallest producer, broke ranks and said it would push for a rise in output. Galo Chiriboga, Ecuador’s oil minister, said that an increase was necessary to help poor countries struggling to cope with record prices.

Analysts said it was likely that Kuwait and the United Arab Emirates, which have spare production capacity, would follow the Saudi lead and raise output.

The Saudi move is a triumph for Mr. Bush, who is under intense pressure at home to provide relief from soaring petrol prices ahead of the summer driving season.

However, Riyadh pointedly waited until Mr. Bush had left the meeting before it made the announcement -- leaving U.S. officials in the embarrassing position of having already briefed reporters not to expect any movement from the Saudis.

SAUDI BOOST RISKS OPEC SPLIT
By Javier Blas (London) and Andrew England (Kuwait City)

Saudi Arabia’s decision to increase its oil production after intense U.S. pressure threatens to deepen the rift that has emerged inside OPEC between the moderate Arab Gulf countries and hawkish Iran and Venezuela.

Analysts said the move was linked to George W. Bush’s personal plea for more oil -- the second this year -- and threats from leading U.S. senators that they would try to stop a $1.4bn (£717m) arms sale to Saudi Arabia.

They also highlighted the deteriorating relations between Saudi Arabia and Iran after Hezbollah, the Iranian-backed Lebanese opposition movement, seized control of western parts of Beirut, and fought loyalists of the pro-Western government, triggering the worst violence in Lebanon since the civil war.

Both the U.S. and Saudi Arabia are staunch backers of the weak Lebanese government and were dismayed by Hezbollah’s actions.

Riyadh, however, presented the decision as one based on oil-market fundamentals that was taken a week ago, ahead of Mr. Bush’s visit.

John Sfakianakis, chief economist at Riyadh’s SABB Bank, said the timing of the increase, on May 10, was interesting because the Saudis knew the U.S. president was going to raise the issue of petrol prices.

“But as the biggest and most important oil producer they also have sovereignty issues and are not just going to say, ‘Thank you, Mr President, we are going to follow your orders,’” said Mr. Sfakianakis.

Frank Verrastro, an energy expert at the Center for Strategic and International Studies in Washington, said it looked as if Washington and Riyadh were trying to avoid the appearance that King Abdullah had been bullied into a rise by the U.S.

Riyadh’s announcement that it was increasing its oil output by 300,000 barrels a day, to pump about 9.45m b/d in June, the highest level in more than two years, came after Venezuela and Iran said this week that the market was well supplied.

Adam Robinson, an energy analyst at Lehman Brothers in New York, said: “The Saudi output increase certainly does not make anyone happy in Tehran or Caracas.”

Iran even suggested that OPEC would need to cut its production, saying that it was storing up to 20m barrels of low-quality heavy oil -- equivalent to a week of imports for China -- in floating storage in the Gulf, for lack of consumer demand.

But Ali Naimi, the powerful Saudi oil minister, said the kingdom had to increase its production because of lower output by other countries.

Although Riyadh usually adjusts its production outside OPEC’s regular meetings to fine-tune its supply to demand, the kingdom usually does not publicize those changes, in order to avoid confrontation with other members of the cartel.

“On May 10 we increased our response to our customers by 300,000 barrels because they asked for it,” he said. He added that Mr. Bush was pleased with the Saudi decision.

Oil at $200 a barrel: that was the warning from Goldman Sachs, published last week. The real price is already at an all-time high. At $200 it would be twice as high as it was in any previous spike. Even so, it would be a mistake to focus in shock only on the short-term jump in prices. The bigger issues are longer term.

Here are three facts about oil: it is a finite resource; it drives the global transport system; and if emerging economies consumed oil as Europeans do, world consumption would jump by 150 per cent. What is happening today is an early warning of this stark reality. It is tempting to blame the prices on speculators and big bad oil companies. The reality is different.

Demand for oil grows steadily, as the vehicle fleets of the world expand. Today, the U.S. has 250m vehicles and China just 37m. It takes no imagination to see where the Chinese fleet is headed. Other emerging countries will follow China’s example.

Meanwhile, spare capacity in members of the Organization of the Petroleum Exporting Countries is currently at exceptionally low levels, while non-OPEC production has equally consistently disappointed expectations.

It looks increasingly hard to expand supply by the annual amount of about 1.4m barrels a day needed to meet demand. This means an extra Saudi Arabia every seven years. According to the International Energy Agency, almost two-thirds of additional capacity needed over the next eight years is required to replace declining output from existing fields. This makes the task even harder than it seems. As the latest World Economic Outlook from the International Monetary Fund adds, the fact that peak production is reached sooner, because of today’s efficient technologies, also means that subsequent declines are steeper.

This is not to argue that speculation has played no role in recent rises in prices. But it is hard to believe it has been a really big one. True, the dollar price has risen sharply, but that is partly the result of the decline in the dollar’s relative value (see chart). As I have argued before, if speculation were raising prices above the warranted level, one would expect to see inventories piling up rapidly, as supply exceeds the rate at which oil is burned. Yet there is no evidence of such a spike in inventories, as Goldman Sachs and the IMF point out.

Similarly, it is not even true that the investment needed to boost the constrained production capacity has been lagging. The WEO shows that nominal investment by national and international oil companies more than doubled between 2000 and 2006. But real investment hardly increased, because of a global scarcity of rigs and associated skilled labor services. Against this background, it seems far more likely that such speculation as there is has been stabilizing, rather than destabilizing: in other words, it is moving prices in the right direction, in order to reduce demand.

Will the high prices succeed in doing this? Certainly. Demand has to match supply for a simple reason: we cannot burn oil that does not exist.

The price spikes of the 1970s were followed by big absolute falls in demand and output. This was partly because of the recessions and partly because of rising efficiency. Both forces should work again this time, but to a much smaller extent. The slowdown in the U.S. economy is indeed likely to be significant. Slowdowns will also occur in western Europe and Japan and even in the emerging world. But the latter will still grow rapidly. Overall, the world economy -- and so world oil demand -- is likely to continue to grow reasonably briskly. Similarly, the improved efficiency of use of petroleum, as people switch to more efficient vehicles, notably in north America (where the room for doing so is so large), will be offset by the rising tide of demand for motorized transport in the world’s fast-growing emerging countries.

On balance, it is quite unlikely that aggregate demand for oil will collapse, as it did after the two previous price spikes, just as it is unlikely that massive net new oil supplies will come on stream in the near future. This does not mean that prices will remain as high as they are today for the indefinite future: such stability is improbable. But it means we should expect a sustained period of relatively high prices even if “peak oil” theorists are proved wrong. If proved right, this would be true in spades.

So what should be the response to these simple realities? Here are some obvious “do nots” and “dos”.

First, do not blame conspiracies by speculators, oil companies, or even OPEC. These are the messengers. The message is one of fundamental shifts in demand and supply. If speculators push prices up in response, they are helping the adjustment. Even if OPEC keeps output back, it is preserving a valuable resource for the future.

Second, do not blame the emerging countries for their growing demand. Citizens of rich countries must adjust to the higher prices of resources that the rise of the emerging countries entails. The only alternative is to attempt to destroy those hopes. That would be a blunder and a crime.

Third, understand that prices at these levels are now playing a big macroeconomic role. At $100 a barrel the annual value of world oil output would be close to $3,000bn. That is 5 per cent of world gross product. The only previous years in which it was higher than that were 1979 to 1982.

Fourth, adjust to high prices, which will play a big part in encouraging more efficient use of this finite resource and ameliorating climate change. The current shock offers a golden opportunity to set a floor on prices, by imposing taxes on oil, fossil fuels, or carbon emissions.

Fifth, do try to reach global agreement on a pact on trade in oil based on the fundamental principle that producers will be allowed to sell their oil to the highest bidder. In other words, the global oil market needs to remain integrated. Nobody should use military muscle to secure a privileged position within it.

Finally, do become serious about investing in basic research into alternative technologies. Energy self-sufficiency is an implausible goal. Investing for a post-oil future is not.

We are no longer living in an age of abundant resources. It is possible that huge shifts in supply and demand will reverse this situation, as happened in the 1980s and 1990s. We can certainly hope for that happy outcome. But hope is not a policy.

The great event of our era is the spread of industrialization to billions of people. The high prices of resources are the market’s response to this transforming event. The market is saying that we must use more wisely resources that have now become more valuable. The market is right.