Bob Tippee
A media frenzy has erupted over suggestions that rulers of Saudi Arabia promised to moderate oil prices this summer in order to influence presidential elections in the US.
Author Bob Woodward of the Washington Post sparked the controversy with his new book Plan of Attack and comments before its publication.
The book, which chronicles events leading to the March 2003 invasion of Iraq, says the Saudi government hoped to "prime" the US economy with low oil prices and implies that the motive was to sway the election.
In a 60 Minutes interview, Woodward said Saudi Arabia "could increase production several million barrels a day" this summer and bring down prices "very quickly," according to a transcript published in USA Today.
Woodward's insinuations collapse around two misconceptions.
One is that price moderation would represent a new Saudi strategy.
In fact, Saudi Arabia has been a price moderate since 1986, when it learned the hard way that crimping supply to levitate price destroys demand.
It hasn't acted to suppress prices recently because—contrary to the second misconception—it possesses limited ability to do so.
The kingdom cannot, as Woodward suggested, increase production by several million barrels per day.
Its spare production capacity, according to the International Energy Agency, amounted in March to 1.5 million b/d. It can raise capacity by 1 million b/d but needs at least 90 days to do so.
Other OPEC members had only 500,000 b/d of unused capacity in March. In an 80 million b/d oil market with inventories painfully low relative to consumption, 2 million b/d offers insufficient protection against easily imaginable disruptions to supply.
These strains ease in the low-demand second quarter but will reemerge during the driving season unless demand stalls.
The summer production increase supposedly promised by Saudi Arabia would erode a supply cushion likely once again to be too thin to cover market emergencies such as new loss of production from Nigeria or Venezuela. Whatever price relief it induced wouldn't last long.
Saudi officials know all this. They're unlikely to have made a promise so difficult and dangerous to keep.
(Author's e-mail: [email protected])