Saudis manoeuvre to end petrol crisis

Prince heads for narrow victory at Opec
Click to follow
The Independent Online

Fraught times in the Middle East, world oil prices back over $30 a barrel, angry protests in the West at the pump price of fuel - and 11 men with strange-sounding names gathering in Vienna, under the arc lights of the international media. For those of a certain age, how familiar it all seems.

Fraught times in the Middle East, world oil prices back over $30 a barrel, angry protests in the West at the pump price of fuel - and 11 men with strange-sounding names gathering in Vienna, under the arc lights of the international media. For those of a certain age, how familiar it all seems.

The men in question are, of course, the oil ministers of the Opec nations. Between them they account for 40 per cent of the world's oil production and three-quarters of its proven reserves. At the end of 1998, the cartel looked a broken force, as oil prices plunged beneath $10 a barrel and its powerhouse, Saudi Arabia, once a synonym for limitless wealth, had become a common debtor.

Today, however, Opec is resurgent. Just as in the 1970s, when Israel fought the Arabs, motorists queued at petrol stations and Carlos the Jackal deemed Opec important enough to take its entire ministerial complement hostage in 1975, the world hangs upon its every utterance. As for Saudi Arabia's Crown Prince Abdullah, he is again the most courted potentate on earth.

But will he - or rather, can he - deliver in Vienna today? The Saudis, Opec's largest producers and the strongest advocates of stable prices, have of late been quietly slipping an extra 600,000 barrels per day (bpd) on to the market, but to no avail. There is thus no guarantee that the extra "500,000 bpd, at least" which the Saudi oil minister Ali Naimi yesterday said he supported will have much effect either, at least in the short term.

In the longer run the current spike in prices, if it persists, will sooner or later produce another oil glut. Exactly as happened after the two great "oil shocks" of the 1970s, high prices will stimulate new investment and new energy saving technology, and bring on stream already discovered fields which were previously unviable. Above all, substitute energy sources will be developed.

As Sheikh Ahmed Zaki Yamani, the Saudi oil minister in the roaring 1970s and lately Opec's self-appointed in-house Cassandra, likes to remark: "The stone age came to an end, but not because the world ran out of stone." And so, if producers are too greedy, it will be with the oil age also.

Right now, however, most Cassandras are on the other side of the argument. Oil is less important to today's service industry-orientated, dot-com era than it was a quarter of a century ago - when steel, cars and machine tools were the measures of a country's economic strength. Even a steep increase in its price need not send the world into recession.

But oil and Opec still matter greatly. Barringuncharacteristicfiscal generosity by Gordon Brown, the £4 gallon of petrol in Britain is a certainty within weeks, perhaps days. More broadly, a combination of low stocks, long lead times for the delivery of cheaper crude to refineries and high demand ahead of the coming northern hemisphere winter, means that the oil price, instead of stabilising or falling, could climb to $40 a barrel whatever happens. Non-Opec producers such as Russia, Norway and Mexico do not have the spare capacity to make a difference.

Each sustained $10-a-barrel increase, it is calculated, adds 0.5 per cent to inflation. Not a vast amount, but perhaps enough to provoke a monetary tightening by the Federal Reserve and the European Central Bank that might trigger the stock market shake-out which many believe is overdue.

There is no surer wrecker of America's long boom and the gathering recovery in Europe than a Wall Street crash. The damage to the West, however, would pale beside that inflicted on third-world countries. The stakes in Vienna this weekend are therefore high.

The most likely guess is that Crown Prince Abdullah will have his way, but narrowly. The problem is that while Saudi Arabia has at least two million barrels a day of spare capacity, several of its partners are already producing all they can. For this grouplower prices simply mean less money.

And there are political limits to Saudi generosity. Too big a production increase and Riyadh will be seen as the resident Gulf poodle of the United States. And this at a time when Arab unease is growing at the misery in Iraq as a result of US-led sanctions, and when Washington is perceived as attempting to bully the Palestinians into an unjust Middle East peace settlement.

It was in 1960 in Baghdad that a toothless Opec held its inaugural meeting. On its 13th birthday, in 1973, the organisation came of age when it broke the link with the big oil companies, and for the first time set the price unilaterally. But this weekend's 40th birthday party in Vienna could yet prove the most contentious of them all.

Comments