Can Saudi Arabia Push Down the Price of Oil?

This weekend, Saudi Arabia will be hosting an Oil Summit in the city of Jeddah, located on the coast of the Red Sea. They have invited executives from oil companies, leaders of nations and the world’s largest oil producers.

The big question for markets is whether or not Saudi Arabia can drive down the price of oil.

So far, I’m a big skeptic. Earlier this month they announced a 200k barrel increase in oil production, but instead of sending oil prices lower, it sent them higher. The same can be said for the pressure that the US has been exerting on oil producers; oil prices only continued to trend higher. The only announcement that actually managed to drive crude lower was yesterday’s price hike from China and even that sell-off failed to last.

There are 3 things driving oil prices higher:

1. Speculation
2. Weak Dollar
3. Supply and Demand Constraints

There will be a lot of finger pointing this weekend. Saudi Arabia is the only OPEC nation with spare capacity. With Venezuela not attending and Iran at odds with Saudi Arabia on whether an oil output hike would matter to prices, OPEC as a group is not expected to hike production. Most OPEC nations blame the oil price rise on speculation.

This Summit is Saudi Arabia’s opportunity to prove to the world that they can increase capacity but what we want to know is how high these oil producing nations think oil prices can rise.

In order for oil prices to start coming down, big changes need to be made and made quickly. Drilling offshore is not the solution because it would be years before we see any results.

How to Bring Relief to US Consumers

If they really want to help consumers, the US needs to propose a similar solution as Italy. The Italians plan on raising taxes on oil companies and giving away that revenue as pre-paid discount cards worth about $620 US dollars to approximately 1.2 millions Italians. Of course, this would only work if the oil companies do not follow suit and raise prices.

If oil prices do not fall after the Jeddah Summit, not only will it keep the dollar firm, but it will also force central banks around the world to remain hawkish.

USA Today has a great guide to some of the issues at play during the oil summit. Here it is:

Comments

[Marcus Aurelius]

The Italian plan is little more than a dog chasing its tail. It will not be long before consumers will be right back where they were.

This also goes for proposals for gas tax holidays and the like.

[MonkDonk]

Oil is a non-renewable resource, eventually we will run out of it.
Here is an interesting chain of events that nobody likes to talk about...
1. In 2000, an orbiting space probe discovered evidence of water flows on the surface of Mars. This supported a long held belief that channels and rivulets on Mars surface were created by running water long ago. Water means that life may have existed.
2. Oil is formed from the remains of animals and plants living in a water environment. Over time, the layering of sediment over the remains combined with heat and pressure result in petroleum deposits.
3. Methane was discovered in the Martian atmosphere by the European Mars express orbiting spacecraft. Methane is a hydrocarbon and has been thought to originate, as petroleum, from dead organisms. In the 1990s, a different theory was introduced suggesting that coal and oil may actually derive from methane (usatoday.com/tech/...).
4. In 2000,NASA, in conjunction with the Department of Energy and engineers from the oil and gas companies, band together to invent a robotic drill to drill "the water" from within Mars. (space.com/sciencea...)
5. In 2004, George W. Bush delivers a speech at NASA touting the exploration of the moon, Mars and beyond in the quest for valuable "resources".
6. In 2006, the prototype of the Mars drill is completed and tested.
My point is the government appears to believe that large reserves of petroleum might exist beneath the surface of Mars. Their efforts are clearly aimed at drilling Mars for "useful resources." How will they get the oil back to earth? I don't know. This may seem farfetched but then again look who's president.

[happycajun]

NICE THEORY! Don't know how they will get the oil back to ol' earth? Details my boy, details. Now, could I interest you in a ground floor opportunity to buy in to MarsACo - easy money - soon we'll have intergalactic supertankers cruising the channels of space... like totally dude.

[Brian Pursley]

Speculation has less than zero to do with the price of oil: www.bloomberg.com/apps...

The only people who say speculation is a factor are ignoramouses and Bolshevik ideologues who want us to be dependent on foreign terrorist oil: news.yahoo.com/s/ap/20...

Russia is the world's biggest producer because they actually drill: www.chinapost.com.tw/b...

Go beg Russia for more oil; they understand geochemistry and physics: oilismastery.blogspot..../

[Alex Filonov]

@monkdonk: There is no need to search for oil on Mars. Comets contain up to 20% of oil-like substances. And deliver them from comets is much cheaper than from Mars. The problem is, this oil will be more expensive than gold.

Short term, oil is in a bubble. Parabolic chart is always a bubble. Long term, drilling is the answer. Come on, we are the only country in the world with complete ban on drilling offshore, with small exceptions in the Gulf. Socialist government of Brazil is drilling like crazy. Communist government of China is drilling anywhere it can. We talk about oil independence. Talk is cheap.

[GKM]

And here I thought this author had some useful comments. Fool me once I guess...

A tax on the oil companies will do absolutely nothing. If you want to do something, tax gas usage. How about that for an idea? Curb demand and you'll lower price. Econ 101. Take the tax and rebate it back in some fashion. Give people free transit passes or bicycles or discounts on fuel efficient vehicles from GM or Ford if you must (to get those people back to work). It doesn't really matter. Tax what isn't desired and reward what is.

Pointless article.

[john s. gordon]

italy (no domestic petroleum resources) encourages conservation by imposing a whopping big annual excise tax on any car w/engine larger than 2 litres displacement. no hummers on the road in italy.
> jack

[francis schutte]

This is PEAK OIL! Even a magician cannot increase supply...so Saudi's surely won't. In the long run, all saving ideas are stupid. Better focus on alternates like hydrogen and/or others.

[StateofConfusion]

We need the high price of oil (but also some stability) to force dim witted Americans to conserve resources. How many women do you see in big SUVs going shopping from mall to mall and dropping off kids for all their activities? They are the biggest wasters of resources.
Speculation is most definitely a part of the price rise. Witness the price of housing or any bubble that was driven by speculation. Oil has more parts and is a declining resource but saying speculators out for quick money are not there is ludicrous. Require a 50% margin on futures and watch the price fall. Of course the trend is up because little was done to demand efficiency. Cheap oil has led to waste and a public mindset of use it now and let the future take care of itself. Drilling along the coast is needed and the excuse that it would not help in the short run is like saying we should give amnesty to illegal aliens because we can't deport all of them (so deport half of them). In 10 year we will need that oil for the long transition and drilling must start soon.

Finally, we need to greatly slow immigration and stop illegal immigration. Finally, Bush is doing one thing right but Obama and McCain are just panderers to Latino special interest groups. Population growth is the main reason resources are running short, do we really need more people here? The future is now here.

[paulk8756]

Oil on Mars...? I hadn't heard that one before, but I have to admit even this doesn't surprise me anymore as one of the "reasons" we shouldn't explore for more of our domestic oil and gas resources. I look forward to seeing this televised testimony before the Democrat controlled Congress one day soon, really!

[paulk8756]

Look, you guys are onto something about methane existing in outer space, seriously. It also exists in huge quantities here on earth, as well. Not only is it a high energy, inexpensive fuel, but no one's talking about our running out of methane, are they?

And there's a reason for that. Methane and oil aren't "fossil" fuels at all, but occur naturally in the earth's mantle, just as methane does on Mars or in comets, throughout our solar system. And that's precisely why we can never run out of OIL or METHANE.

That's not to say that oil won't be more expensive to produce in coming years, or that using renewable fuels and new technologies in the transportation sector of our economy isn't a good idea. But the myth that oil is somehow "running out" only serves to drive up ALL energy prices unnecessarily.

[paulk8756]

So, let's see...

Who benefits from the idea that the world is running out of oil..? Why, it's the nationalized oil producing countries, and the big oil companies, of course!

[bearfund]

Italy's plan will raise prices, not lower them. Increasing taxes on oil production provides an incentive to produce less. Subsidising consumption provides an incentive to consume more. Less production + more consumption = higher prices. I'd say I learned this in Econ 101 but that would be a lie; it should be obvious even to children.

The best thing the government can do about oil is nothing. Private industry needs to, and will if market incentives are left in place, take a multi-pronged approach: increase oil supply through exploration, bring more alternatives to market especially for electricity generation, and reduce consumption by increasing efficiency and replacing profligate lifestyles with simpler ones. All of this is happening. The price of oil may fall or it may not, but in the future it is sure to be lower if the market is allowed to work than if the government attempts to pick winners in alternatives, subsidise consumption, tax "windfall" profits from production, or implement any of the other harebrained schemes they've thought up.

[paulk8756]

You know, as I think about it, I may change my mind. Maybe a windfall profits tax wouldn't be so bad, contingent on getting the members of OPEC and the Russians to pay it. Sort of a global version of the Italian idea. But they'd need to give us debit cards to send us our rebates directly, so the politicians in Washington couldn't get their hands on our money. Maybe the author of this article would go for that...?

[mark van]

StateofConfusion...aft... reading your post I understand why you call yourself State of Confusion...

[Ronmac]

Sure, tax the oil companies and give the money back to the consumers...dumb, dumb solution to cure a problem of using too much oil. Of course Hugo Chavez is doing that and Mexico is doing that...and just look how much additional oil they are finding/producing!

[Chubbs]

The oil companies are pretty low profit margin compared to many business. Tax them and what you will see is less oil production and higher prices. What a great idea!
But back to Saudi Arabia: the " extra" oil they are offering is so sour that no refinery will touch it. It is p.r. for total idiots to believe in. A joke.

[Brian Pursley]

Why in the hell would Saudi Arabia WANT to push down the price of oil?

They might be Muslim but they aren't that retarded.

Oil is infinite and renewable. Peak oil is garbage.

[Kunst]

Interesting numbers....

1) The US is still the world's 3rd largest producer of oil (8.7 bbl/day), not that far behind Saudi Arabia and Russia. If I recall right, #4 Iran produces less than half as much. The problem is we consume well over twice what we produce.

2) The table shows US production at 8.7 and consumption from domestic production at 5.1. So what happens to the other 3.6 million barrels per day we produce? I have heard that some part of our current Alaskan production goes to Japan or the international market in general.

Kathy Lien's articles always sound interesting but amount to not much at all. I used to read DailyFX regularly before deciding it was a waste of time.

[Kunst]

"They might be Muslim but they aren't that retarded."

Brian Pursley, you are a jerk.

[Brian Pursley]

Oh lighten up. It's only a religion. If I said the same about Christianity or Judaism you'd praise me and call me charismatic.

[MNSL]

Yes this time Saudi Arabia will put down oil price.

I think Saudi Arabia will increase their oil production very soon. Government in Saudi Arabia also wants solutions to the inflation now. They also fear about collapse of other industrial sectors. They think higher oil prices are not sustainable and it will hit hard their economy as well. In addition I think they have realized their future depend on strong world economy. They know that their investments also going to lose due to present credit crisis in the world.

With slower world growth oil consumption will come down. It is happening all over the world now. People are more careful now some use bicycles and scooters instead of cars now.

Now George Soros see bubble in the oil market
I heard Goldman analysts Arjun Murti has reiterated his view that oil prices could fall to $75/barell once demand come down.

Given above facts we can see strong correction in the oil market soon. I think this is the longest commodity bull market we ever had. Bull markets will not last for ever.

[Ronmac]

MNSL, I don't think the Saudis can do it. And I don't think demand is going to go down enough. That said, I can't say you might not be right for the short term. As to this being the longest commodity bull market ever, I don't think is is anywhere near that.

[paso11]

The Suadis simply dont have the spare capacity to influence the price siginificantly.

There is an argument that oil is too cheap at current prices, just work out how much a pint of oil costs...

[André Sautou]

Until around 2005, Saudi Arabia acted as a “swing producer”, adjusting its production to demand in such a way that crude prices were kept moderate. But why did they then stop playing that role ? Because they could not play it any longer on account of their oilfield’s decline, or because of deliberate policy intended to prop up prices in order to increase their profits while extending the lifespan of their resource ?
Maybe for both reasons simultaneously. The kingdom’s ruling elites may have judged, on one hand, that they could no longer act as a “swing producer” in the context of a demand growing too fast ; and, on the other hand, that getting bigger profits from high selling prices would allow them to solve serious domestic problems …
Now, with demand greatly bridled by those high selling prices, they may estimate that they can – and must – resume their previous role in order to stabilize the prices (or at list moderate further increases) and in doing so avoid a premature collapse of the world economic system they depend on and in which they detain profitable capital.

"My grandfather rode a camel. My father rode in a car. I fly a jet airplane. My grandson will ride a camel", use to say the Saudis. With God’s help, reverting to riding a camel may be delayed by one or two generations … on condition to make decisions able to lead God’s will in the right direction.

André Sautou