If Saudis pump more oil, will gasoline prices fall?
Before the invasion of Iraq, former Saudi oil minister Ahmed Zaki Yamani warned the United States it was "playing with fire."Skip to next paragraph
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So it has proved - not just politically but economically as well.
Continuing uncertainty over Iraq pushed oil prices above $40 a barrel on May 11 for the first time since 1990. Though crude dipped below $40 late last week, economists say the price spike, if continued, will be a drag on the US and world economies. Nine of the 10 post-World War II recessions in the US were preceded by sharply rising oil prices.
Only one nation can turn the situation around: Saudi Arabia.
In a key meeting Thursday in Beirut, OPEC (Organization of Petroleum Exporting Countries) will discuss a Saudi plan to boost its output to maximum capacity. The goal: to drive down the price of oil - and thereby eventually ease the price crunch on the world's drivers.
Most OPEC nations are running at full capacity already. Kuwait and the United Arab Emirates may have a little excess capacity. But only the Saudis have sizable excess capacity - not to mention the world's largest proven oil reserves.
Last weekend's terrorist attack on an upscale housing compound in Khobar - the heart of the kingdom's oil industry - has further raised concerns that the Saudis may be unable to protect their oil facilities. When oil trading resumed Tuesday, its price surged back above $40 per barrel.
Saudi Arabia pumped 8.3 million barrels per day (b.p.d.) in April, above its OPEC quota of 7.64 million. Saudi officials say they are raising output to 9.1 million b.p.d. to meet rising world demand and hope to boost their nation's capacity to 11.3 million b.p.d. by fall.
Although terrorists may wish to disrupt that production, the Saudis maintain that their oil fields are well protected against attack.
World demand, surging above forecasts, could soak up extra Saudi production and leave prices at a high level. Oil prices per barrel are likely to stay in the $30s and "at times possibly into the $40s" for one to two years, forecasts Cambridge Energy Research Associates.
When Sheikh Yamani was the leading figure in the oil producers' cartel, during the energy crises of the 1970s, OPEC was often viewed as a knavish group - quadrupling oil's price unjustly at the expense of consumers.
"Today, nobody thinks of OPEC as a villain," says John Lichtblau, a veteran oil economist at the Petroleum Industry Research Foundation in New York. No one in a responsible position in Washington or in European capitals condemns it. "The emphasis is on collaboration and consultation," he says.
Why? Because governments crave stability in energy prices. And OPEC has become a welcome though imperfect regulator of world oil prices. By turning the spigot on and off, the cartel tries to manipulate prices.
For example: In 1986 George H. W. Bush, then vice president, asked Saudi Arabia to raise the price of oil, according to Yamani. At the time, low prices were devastating oil-producing areas in the US, such as Texas.