1.

In depth

Oil

SAUDI OIL BOOST FAILS TO ALLEVIATE CONCERNS
By Andrew England and Carola Hoyos

Financial Times (London)
June 22, 2008

JEDDAH -- Saudi Arabia’s decision to pump more oil than it has in nearly 30 years risks being completely negated by the sharp drop in output caused by attacks on production facilities in Nigeria.

Nigeria now pumps less than 1.5m barrels a day, its lowest level in 25 years, rather than the 2.5m b/d it has the ability to produce, according to officials attending Sunday’s high-level meeting in Jeddah, Saudi Arabia.

The hastily convened conference of consumers and producers, as well as energy ministers and oil company chief executives from around the world, is likely to be seen as a disappointment because it yielded little more than had been expected from the world’s largest exporter in spite of global concerns that developing countries were cracking under the burden of record oil and food prices.

Saudi Arabia confirmed it would pump 9.7m barrels a day next month, an increase of 200,000 and the highest level in nearly 30 years, as it repeated its standard offer of extra barrels if customers demanded them.

The kingdom also reiterated its promise to expand production capacity, noting that it expects to achieve 12.5m b/d next year and could add an additional 2.5m barrels -- if needed -- after that with a massive investment program.

Ali Naimi, Saudi Arabia’s energy minister, said in a speech: “This will enable us to maintain our spare capacity in the interest of global market stability -- which is in everyone’s interest.”

Saudi Arabia’s spare capacity is now estimated at 1.5m b/d, the lowest in a generation, but as it pumps more oil into the market, that cushion shrinks. The fear that the kingdom’s extra oil might not be enough is one element that drove oil prices to a record $139.89 last, week -- double what they were a year ago.

Such fears are fuelled by -- among other things -- attacks by militant groups in Nigeria. For long Africa’s largest producer, the country recently fell to second place behind Angola, crippled by attacks such as those on fields run by Royal Dutch Shell and Chevron, which stopped production of 345,000 b/d.

The communiqué issued at the end of the conference broadly touched on all the main issues raised by both consumers and producers, from the need to improve the transparency and regulation of financial markets to the need to increase investment in upstream and downstream projects. But it provided no solid details. A follow-up meeting is expected to be held in London before the end of year.

Robert H. Laughlin, of MF Global in London, said oil ministers had attempted to put a brave face on the outcome of the summit. “I fear this may turn out to be an understatement, especially when you take into account the recent losses from Nigerian production which wipes out any fresh oil offered by the Saudis,” Mr. Laughlin said.

2.

World

SAUDIS ACT TO AVOID BLAME FOR PRICE RISE
by Andrew England

Financial Times (London)
June 22, 2008

http://www.ft.com/cms/s/0/c512c8b8-4087-11dd-bd48-0000779fd2ac.html

King Abdullah, ruler of Saudi Arabia, opened the unusual oil meeting in Jeddah on Sunday by describing rocketing fuel prices as unjustifiable, before laying out ways in which he thought the world could act.

He proposed that the World Bank lead an “energy initiative” for the poor and said his kingdom would allocate $500m (320m euros, £253m) from its development fund to help developing countries obtain energy and to finance development. He also called on OPEC to set up a parallel $1bn program to its fund.

The image he sought to portray was obvious: Saudi Arabia -- the world’s largest oil producer -- was concerned about the impact of record oil prices and wanted to show the world it would act “responsibly.”

Soaring energy costs have prompted concerns about political and social instability in developed countries and fuelled high inflation in many nations. And the last thing Saudi Arabia wants is to be blamed.

A key factor behind the king’s decision to call for Sunday’s meeting was the frustration that Saudi Arabia has been feeling about what it describes as “finger-pointing” from the West.

“In this critical hour the world community must rise to the level of responsibility; co-operation should be the cornerstone of any efforts,” King Abdullah said. The delegates’ mission, he said, was to “rule out biased rumors and reach the real causes for the increase in price.”

Saudi officials have been at pains to say its increases in oil production fall into line with its role as a market stabilizer. But Sunday’s meeting and other recent initiatives also tie into the kingdom’s desire to boost its influence and role in regio­nal and international affairs.

The Saudis are concerned by their image in the U.S. and do not want oil to become an election issue that draws unwanted attention to them.

Saudi Arabia spends billions of dollars on aid and development programs, mainly in Muslim countries. The amounts have been increasing with the unprecedented oil boom, which has buoyed the kingdom’s confidence and its desire to counter Iran’s growing influence in the Middle East.

“Now we are seeing all the problems and crises that are happening in the region and there’s one country that can attempt to do something, and we are trying to do it,” said a Saudi adviser.

Among its list of recent initiatives are plans for dialogue between Christians, Muslims, and Jews, and to set up large agricultural pro­jects overseas to secure supplies of food. Each plan has a domestic element, but they are also seen as part of strategy to enhance the kingdom’s influence and shore up its Muslim allies.

3.

SAUDI KING LAMBASTS SPECULATORS AT OIL PRICE SUMMIT

Agence France-Presse
June 22, 2008

http://afp.google.com/article/ALeqM5hjeemQwn9qRJNc4Y-M9HprTnTz8Q

JEDDAH, Saudi Arabia -- Saudi Arabia's King Abdullah condemned oil "speculators" on Sunday at a summit on the spiralling price of crude which called for greater transparency in market dealings.

Saudi output has risen to 9.7 million barrels a day (bpd), the king said, vowing to further increase production if necessary to defuse market tensions which have sent the price of a barrel of oil up to almost 140 dollars -- sparking angry protests in several countries.

The monarch, who said Saudi Arabia would give 1.5 billion dollars to efforts to ease energy shortages in poor nations, told the 36-nation summit his country was "very concerned" about consumers worldwide.

He blamed increased oil consumption and taxes on fuel, but added: "Among other factors behind this unjust increase in oil prices is the abhorrent act of speculators acting for their own selfish interests."

The summit in the Saudi Red Sea city of Jeddah was the scene of an international debate over the cause of the doubling of oil prices in the past year.

The United States and other Western powers blamed production shortfalls while Saudi Arabia and other Organization of Petroleum Exporting Countries (OPEC) members said speculators have played a key role.

The final communiqué by leaders and ministers from the 36 nations called for greater regulation of oil markets and greater investment in refining capacity.

"The transparency and regulation of financial markets should be improved through measures to capture more data on index fund activity and to examine cross-exchange interactions in the crude market," the statement said.

It added: "An appropriate increase in investment, both upstream and downstream, is necessary to ensure that the markets are well supplied in a timely and adequate manner."

OPEC was split, however, over whether to follow the Saudi lead in increasing output.

Kuwait said it was ready to increase production, but the OPEC president -- Algeria's Oil Minister Chakib Khelil -- insisted this was not necessary.

U.S. Energy Secretary Samuel Bodman said "there is no evidence that we can find that speculators are driving futures prices" to current record heights.

He told the meeting: "Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing -- and increasingly volatile -- prices."

Warning that prices would almost certainly rise further, Bodman said: "In the absence of any additional crude supply, for every one percent increase in demand we would expect a 20 percent increase in price in order to balance the market."

German Economy Minister Michael Glos told the summit an increase in production would be "a strongly needed signal to the financial markets to not gamble any more on an increasing oil price."

India's Finance Minister P. Chidambaram and Australia's Resources and Energy Minister Martin Ferguson also called for increased output.

Kuwaiti Oil Minister Mohammed al-Olaim said OPEC members "will not hesitate" to increase production if the market needs it.

But OPEC chief Khelil insisted there is enough oil to supply the market.

"We believe that the market is in equilibrium. The price is disconnected from fundamentals. It is not a problem of supply."

Khelil said the 13-nation OPEC would only consider a production increase at a meeting in September.

"We believe speculation, in its noble and not noble terms, has its impact," the OPEC chief said, also blaming "uncertainties on the dollar" for the soaring price.

A Saudi source said there is scope for other countries to follow the production increase as there are up to three million barrels of spare capacity within OPEC nations.

British Prime Minister Gordon Brown, senior Western leaders at the summit, called for a "new deal" between consumers and producers.

But like many Europeans at the meeting he said production shortages and speculation had to be studied.

Brown said that the world was going through "the biggest of all three oil shocks" in recent decades.

Saudi Oil Minister Ali al-Nuaimi said, however, that the world has enough crude to last "many decades" and that Riyadh will invest 129 billion dollars to be able to produce 15 million barrels a day (bpd).

Nuaimi said Saudi Arabia's production capacity will rise to 12.5 million bpd by the end of 2009 and another 2.5 million bpd could be added if demand warranted.

4.

Business

BLAME CENTRAL BANKS, NOT SPECULATORS FOR OIL PRICE
By David Uren

Australian (Sydney, Australia)
June 23, 2008

The price of oil is unlikely to be reduced sustainably either by Saudi Arabia increasing its production or by mad Austrian schemes to tax speculators out of the oil market, both of which got an airing at the oil summit in Jeddah at the weekend.

As was the case in the 1970s, the oil price is rising in response to a falling greenback and rising inflation at the end of a long period of economic expansion.

Slower world growth, lower inflation, and a firmer U.S. dollar would set the market back to rights. The question is whether that can be achieved gradually or will be forced through the shock of a global recession. Politicians would like a simpler solution.

Kevin Rudd railed in parliament last Friday against "excessive speculation within the oil industry itself and increasing evidence that some financial institutions may be trading in oil as an investment like shares and currencies."

There are echoes around the world. While the Austrians want a tax on oil speculation, Italian Finance Minister Giulio Tremonti wants to raise the minimum deposit before investors are allowed to acquire oil futures contracts. He says of rising oil prices: "The causes are not structural, but on top of the barrel price (of oil) there is a magnum of speculative champagne." French President Nicholas Sarkozy has called for an end to "capitalism of lies, of frivolity."

The speculator is the age-old scapegoat in economic uncertainty. Investment in commodity indexes, as an asset class, have certainly taken off, rising from $US13 billion to $US260 billion ($273 billion) over the past five years. Energy prices make up about 70 per cent of their value.

However, if investors in these indexes were forcing prices higher by generating demand for oil in excess of that from refiners, the result would be an accumulation of oil inventory and this has not been the case.

An honest assessment would look to the culpability of the world's central banks in running loose monetary policy over the past decade. The slashing of U.S. rates over the past six months in response to recession fears raises the prospect of one last inflationary wave of excess liquidity washing into world markets.

We have been here before. Some of the best oil industry market analysis comes out of Rice University in Texas. A recent paper by Amy Myers Jaffe and Mahmoud Amin El-Gamal from Rice traces the cycles of boom and bust in the oil market back to the dawn of the oil age in the middle of the nineteenth century.

Periods of increased trade and globalization increase demand for energy and, since supply cannot respond quickly enough, bring higher prices in their train. Higher energy prices become caught in the momentum of inflation, which becomes self-perpetuating as negative real interest rates develop. Inflationary cycles have typically ended with recessions following currency and banking crises. The high oil prices of the 1870s, the late 1920s and the early 1970s were all accompanied by a period of financial turmoil. Jaffe and El-Gamal contrast the movement in the price of gold with that of oil. Gold is the classic hedge against inflation and was the central measure of value until the collapse of the Bretton Woods agreement on global currencies in 1971. They suggest that if you focus on gold as the measure of value, the volatility caused by loose monetary policy in a dollar-centered world becomes apparent.

As inflationary forces develop, the price of gold takes off. After a time, there is a catch-up as the oil market restores its value. That increase pushes inflation further and gives the gold price a fresh burst.

The oil-price boom of the early 1970s is attributed to the newly formed OPEC cartel exercising its power in the wake of the Six-Day War between Israel and its neighbors.

"Geopolitical events, such as the infamous Arab oil embargo, might have played a catalytic role, but the fundamentals of renewed high oil prices can be traced back to the new dollar-centred international financial system," the paper says.

Huge U.S. balance-of-payments deficits made it no longer tenable to guarantee the exchange of dollars for gold at the standard rate of $US35 to the ounce, leading president Richard Nixon to sever the nexus in 1971. The dollar fell and the price of gold soared as markets feared the inflationary consequences of a world floating on a sea of dollars. If you measure the cost of a barrel of oil in ounces of gold, the value of oil halved between 1970 and 1973, when the oil crisis raised it three-fold.

As inflation took firmer grip, the price of gold quadrupled. Inflation cut the gold price of oil in half again between 1976 and 1979, leading to the major correction of oil prices following the Iranian revolution in 1979.

It was not until U.S. Federal Reserve chairman Paul Volker doubled U.S. interest rates to 20 per cent, provoking recession in the early 1980s, that inflation was beaten, the gold price fell and the oil price stabilized.

Oil prices were depressed for almost two decades, apart from the brief spike around the Iraqi invasion of Kuwait in 1990. However, by the turn of the century, OPEC was beginning to regain its ability to co-ordinate production quotas, restoring the real price of oil to levels last seen in the late 1990s. The cycle of the 1970s is now repeating itself. Low interest rates in the wake of the 2000-01 tech wreck raised the prospect of inflation and sent the gold price rising from $US300 an ounce in 2003 to surpass $US500 in 2005. The gold price of oil again slipped before recovering ground again as oil prices started strengthening.

The continued fall in the value of the dollar against other currencies, reinforced by low interest rate policies designed to keep the U.S. from slumping deep into recession, there is scope for the inflationary dynamic to push the price of oil further.

"OPEC's reluctance to increase production currently in part reflects their view that high prices owe more to lax U.S. monetary policy than to supply shortage," the paper says.

The U.S. dollar's status "would likely come to an end." It its place, the paper's authors forecast a new multi-currency basis to the financial system, as governments broaden their holdings away from dollar-denominated debt.