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The Saudi Oil Summit: Pipeline to Nowhere

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What was billed as a serious meeting between producing nations and consuming nations, held in Jeddah last weekend, turned out to be a Saudi public relations ploy playing on the concerns of those impacted by high oil prices. Nothing meaningful was accomplished, no significant change in policy other than permitting the Saudis and their OPEC cabal choir to regurgitate their tired mantras of, "its not us, its them", whoever the "them" of the day might be (those "speculators" in this instance).

Within a few days after the "summit" the price of oil climbed to a new and current historic high of $142.00 plus/bbl. What is clear, given Saudi Arabia's actions, is that Saudi Arabia, as the putative leader of OPEC can no longer be trusted as a reliable supplier of a basic raw material on which we and the world are dependent. No matter what changes in the market lie ahead, the Saudis have shown their true colors, and they are not pretty. Their modus operandi is simply to maximize the degree of gouging to the maximum possible extent no matter what the consequences to their customer base, that is to say the world's economy. In essence their customers be damned. It is as though a baker, his bakery built with the help of the community, charges $135 a loaf of bread in times of famine -- and yes, it costs the Saudis probably less to pump a barrel of oil than the baker to bake his loaf of bread (In a November 1999 speech Saudi Oil Minister al-Naimi speaking to the Houston Forum pegged his country's inclusive cost of production at less than $1.50 per barrel. As for the cost of discovering new reserves he boasted Saudi Arabia spent less than 10 cents per barrel). Such a baker might become wealthy, but he would be ostracized from polite society, as well he should. And when plenty returns in whatever form, his greed should not be forgotten.

The summit fell short on many issues:

- Among the summit's aims, according to Reuters, was "to reinforce transparency" and arrive at a better understanding of the impact of financial markets on prices and their volatility. Other than lip service, very little was achieved other than citing speculation and thereby providing the Saudis with a convenient scapegoat to current price levels.

- Transparency was further denied through Saudi Arabia's cavalier dismissal and irresponsible stonewalling of all calls to share with the world accurate information on production and reserves enabling the world's economies to rationally and responsibly plan their future energy parameters. "Transparency and data are key to the smooth operation of markets," and as repeatedly enunciated by Great Britain's Prime Minister Gordon Brown, who was in prominent attendance at the summit, "We need more information about oil reserves". Nothing of significance was forthcoming.

- The Saudis, after having organized the summit with barely a week's notice, presented the gathered oil nabobs, arriving from all corners of the world, with exciting news. To underscore their commitment to assist the oil market out of its current conundrum they announced with great fanfare that they expected to increase oil production capacity to 12.5 million/bbls a day in 2009, and possibly to 15 million/bbls shortly thereafter. News that was hot off the press ever since then Prince (now King) Abdullah visited with President Bush in Crawford, Texas in April 2005.

- And finally and significantly, the Saudis hiding behind the canard that high prices were all about speculation, pointedly announced an increase in production of 200,000bbls/day beginning in July. What was not mentioned is that even with this and previous increases the Saudi/OPEC daily production was still 700,000/bbls short of the total 1.7 million barrels a day cutback made in early 2007. Clearly if the production capacity was there before the 1.7mm barrel cutback, it would continue to be there today. And were the Saudis serious in helping abate runaway prices they would, without hesitation, increase their daily oil output to make up the full amount of the 2007 cutback. Without that commitment, that is to reinstate the full 1.7 million barrels, all else is theater. This, most especially in that the price of oil has escalated more than 175% since the 2007 production cutback.

- The theater of the absurd in Jeddah reached its apogee when, with myriad a background of price riots and work stoppages throughout the world, with the economies of many less developed nations teetering at the brink, King Abdullah would pronounce "We are very concerned for consumers in all countries". Perhaps the concern is truly genuine. Then the solution would be straightforward. Saudi Arabia could simply cut prices and revert to the pricing mechanism of the early eighties before the futures market took hold, delink from the international futures markets and, as was then the case, set its price monthly. Of course, and sadly, that is not going to happen. Yet it has become abundantly clear that the futures markets have become a means of subverting true market forces to the great advantage of the oil producers, and of course Saudi Arabia is the major beneficiary.

- Given the unwillingness of the Saudis and their assembled OPEC brethren to propose anything meaningful that would alter current price or supply trends, the Jeddah meeting was a dud. In that sense, because it was a non event in the face of high expectations, the Jeddah summit can be said to be contributing to ever higher prices. Hardly the result one would have hoped for nor anticipated, though in this oil game negative surprises have become the norm.