Can Saudi Pumps Help Ease Prices?

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Kazuyoshi Nomachi / Corbis

A petrochemical plant is shown in Al Jubail, Saudi Arabia.

Having spent the better part of a year snubbing pleas from President Bush to pump more oil onto the world market, Saudi Arabia's King Abdullah is suddenly scrambling to ease rocketing oil prices. On Sunday, Abdullah told U.N. Secretary General Ban Ki-Moon that his country would increase its output starting in July, probably by about 500,000 barrels a day. And in a rare move to coordinate with other oil producers, Saudi officials have invited OPEC oil ministers as well as U.S. and European officials to an emergency meeting on oil prices in Jeddah next Sunday.

But while all of that may sound like urgent action to ease the pain of record oil prices, energy analysts are skeptical over how much relief it will offer. The Saudi promise of extra oil, they say, may do more to soothe the jangled nerves of Western politicians than to lower the price of oil. "This is a public relations exercise to some extent," says Greg Priddy, global oil analyst for the Eurasia Group. "It is an election year, and the Saudis know that the price of gas is an election issue. They want to pump out the message to the West that 'We are not trying to hurt your economy.' "

The sentiment, to be sure, is genuine — Saudi officials fear that if oil prices keep rising, the result could be a U.S.-led global recession that would drag down oil-producing economies, too. "The Saudis are really, really, really concerned," says Roger Diwan, a partner at the Washington-based consultancy PFC Energy. While Saudi officials are tight-lipped about their economy, Diwan believes the country now has double-digit inflation. "They know that these oil prices are not good for the global economy, for the consumers, or for them."

Saudi Arabia, with by far the world's biggest oil reserves, is the only OPEC member with the excess production capacity that allows it to boost supplies when it sees the need. The Saudis currently pump around 9.2 million barrels a day, and could raise that to 9.7 million a day in July. But despite their excess capacity and their influence in OPEC, the Saudis may not have the power to cool the overheated oil market. The extra 500,000 barrels they plan to start shipping next month will likely be heavy, "sour" (sulphur-rich) crude, which most Saudi fields produce. Sour crude is far more difficult to market globally than light, sweet crude, because it needs a lot more refining to meet the environmental standards of the industrialized world. "The Saudis would discount it further, because refiners don't want it," says Harry Tchilinguirian, senior oil analyst in London for BNP Paribas.

Worse, some energy analysts question whether Saudi Arabia really has enough extra oil at hand. "It is conceivable that they could draw it out of storage tanks," says Priddy. "You will not see a large enough amount of new oil coming into the market." While Saudi officials plan to launch two big new oil fields during the next two years, Priddy and Tchilinguirian believe market prices have already taken those increases into account — and that means that even when new production comes online possibly next year, it is unlikely to bring down world prices. Tchilinguirian believes that U.S. and European officials "are refusing to see a basic reality: demand is strong and it will remain so." The answer? Build more refineries, and stop guzzling gas. Until then, swallow hard when you see the prices at the gas pump.