In April 1986, Vice President George H. W. Bush traveled to Saudi Arabia with a stern warning. Record low oil prices of $10 a barrel threatened...
WASHINGTON — In April 1986, Vice President George H.W. Bush traveled to Saudi Arabia with a stern warning. Record low oil prices of $10 a barrel threatened the U.S. oil industry and U.S. national security. If prices don’t rise, he warned, perhaps a U.S. tariff on imported oil would do the job.
More than 22 years later, his son George W. Bush is on a similar mission, but with the opposite goal in mind. President Bush meets today with Saudi King Abdullah and will lobby for help in bringing down world oil prices, which have raced past $125 a barrel.
Then and now, the Saudis are the only oil power with enough unused production capacity to make a difference on price if they increase supply. But the hard fact is that the world oil market has changed, and Saudi Arabia is far from the only producer holding the fate of U.S. consumers in its hands. Even if the Saudis increase production, shortfalls elsewhere, along with rising global demand, can offset their efforts — and are.
Many Americans grumbling at the gas pump are quick to blame the Saudis for their woes — just as many might be surprised to learn that Saudi Arabia trails Canada and Mexico as the chief suppliers of foreign oil to the United States and isn’t far ahead of Venezuela, Nigeria and Angola. Saudi Arabia provided 14 percent of U.S. oil imports in 2006. Still, if it boosted production significantly, added world supplies would tend to drive global oil prices down, regardless of who bought its exports.
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Saudi Arabia is the world’s only significant swing producer: Its oil production can be ratcheted up or down to lower or raise prices worldwide. (Iraq potentially could do the same if it achieved stability, but that’s not a near-term prospect.)
So what have the Saudis done since 2005, when oil prices climbed above $70 a barrel, then $80, then $90, and this year broke the once-unthinkable threshold of $100? They have increased production capacity, meaning that in a pinch they could make up the difference between global demand and available supply. They now can produce 11 million barrels per day, or bpd, and expect that number to reach 12.5 million bpd by 2010.
“They’ve not only invested tens of millions of dollars to increase production capacity. They’ve increased their actual production from 8.5 million barrels per day (mbpd) to 9.2 mbpd,” said Frank Verrastro, director of the energy and national-security program at the Center for Strategic and International Studies, a center-right think tank.
His numbers are somewhat squishy; actual production numbers are hard to verify. Some critics believe the Saudi government has increased capacity but actually dropped output by 1 million bpd over the past two years. The Energy Information Administration, the statistical arm of the Energy Department, said that in 2006 — the last full year for which it has data — the Saudis produced 10.7 million bpd.
That’s why some Democrats in Congress, including New York Sen. Charles Schumer, are threatening to hold up a $1 billion-plus arms deal for the Saudis, a crucial ally in the global war on terror, unless the kingdom puts more oil on international markets.
“We are saying to the Saudis that if you don’t help us, why should we be helping you?” Schumer said this week.
The Saudis are said to be reluctant to pump much more oil since U.S. oil inventories of late have been higher than five-year averages. That suggests that oil isn’t in short supply here, and that other factors, such as the weakening U.S. dollar and speculation in commodities markets, are driving up prices.
“I think the president has no intention whatsoever of having the Saudis put more oil in the market,” said Fadel Gheit, an industry analyst for Oppenheimer & Co. in New York. “If the president wanted the Saudis to do that, he would not have asked them publicly.”
Nevertheless, global oil prices are still rising. Why? Because global demand for oil is growing outside the United States, which alone accounts for one-quarter of world oil consumption. China and the Middle East each account for about one-third of new oil demand, and they are sopping up new production. The Paris-based International Energy Agency this month estimated global oil demand in 2008 at 86.8 million bpd, about 1.2 million bpd more than in 2007.
In addition, other important oil suppliers are falling short in production for various reasons. Nigeria has more than 1 million bpd of production offline because of civil strife. Russia is the world’s second-largest oil producer and exporter, but after nearly a decade of increasing production, it seems to have reached a plateau for easily accessible oil, and output is flat.
In Mexico, the second-most important supplier to the United States, production continues to erode faster than forecast in the giant offshore oil field called Cantarell. For political reasons — nationalism — the country has been unable to modify its foreign investment laws to allow state-owned Petroleos Mexicanos (PEMEX) to work with major oil companies to explore for deep-water oil in the Gulf of Mexico or develop its hard-to-access oil deposits in Veracruz state.
“Mexico has a lot of potential, but its hands are tied politically,” said oil historian Daniel Yergin, author of “The Prize,” the definitive account of oil’s rise to economic importance. “I think if the Mexican industry had access to the technology and could call upon the skill and experience of the international industry, it could turn the picture around within a few years. But it is just really constrained.”
Yergin made headlines two years ago, swimming against the current by predicting a potential oil glut as more production came on line. He turned out to be half right.
Brazil’s offshore oil discoveries and a bevy of projects around the world slated for development suggest there’s still plenty of petroleum to be pumped. But the rising costs for everything from offshore rigs to petroleum engineers to ocean transportation have delayed completion of these projects significantly.
“There’ve been shortages of people, equipment, rising prices of steel and other commodities. And that has really constrained the supply” of oil, Yergin said.
President Bush seems resigned to high oil prices for now, telling CBS Radio on Monday before he left for the Middle East that the “demand for oil is so high relative to supply these days that there’s just not a lot of excess capacity.”
Since about 40 percent of the world’s oil comes from the cartel OPEC, member countries have little incentive to reduce the price by producing more. They earn more by producing less. Asking them to produce more is effectively asking them, instead of the American consumer, to swallow a loss.
“We don’t ask Microsoft to do that. We don’t ask Coca-Cola to do that. But somehow we think the oil companies should do that,” Verrastro said.
The United States has 5 percent of the world’s population but uses one-quarter of all oil produced. It is the third-largest oil producer, sitting atop plenty of oil in Alaska and along its coastlines that for political reasons it chooses not to tap.