The "oil crisis" of 2004 is one more sign that a Bush administration that once hoped to transform the sources of instability in the Middle East is instead retrenching to a messier version of the old status quo.
Desperate to slow the recent rise in oil prices, finance ministers from the Group of Eight industrialized countries last weekend demanded that OPEC countries raise their production, arguing in their communique that "lower oil prices would be of benefit to the whole world economy." Since Saudi Arabia is the only OPEC country with much spare capacity, that put the kingdom back in the familiar position of receiving entreaties from skittish Europeans, Japanese and Americans.
The Saudis responded graciously enough, and why not? They are in the driver's seat. Saudi Oil Minister Ali Naimi promised that the kingdom would pump an additional 600,000 barrels a day, boosting its output to 9.1 million barrels daily. And Saudi sources have been hinting that they're prepared to go further -- up to the kingdom's current maximum of about 10.5 million barrels a day.
To underline Saudi Arabia's decisive role in the oil market, Saudi officials were telling insiders at an International Energy Agency meeting in Amsterdam yesterday that over the next several years, they may increase their maximum capacity to 11.5 million or 12 million barrels per day -- to maintain their preferred excess-capacity buffer of 2 million barrels a day above planned production.
In this week's frantic market, even the Saudi offers to boost production haven't significantly pushed prices down. But analysts expect that as the market steadies, prices will fall several dollars from yesterday's record futures-market close of $41.72 a barrel.
The drama on the oil spot market has masked the fact that the recent price squeeze has been building for several years -- and is largely a result of conflicting policy decisions made in Washington and Riyadh. A rapidly growing Chinese economy meant that upward pressure on prices was inevitable. But neither the Saudis nor the Americans took appropriate steps to defuse the problem before it became a crisis.
The Bush administration contributed to the oil price squeeze in several ways, according to industry experts. First, it failed to address the fact that demand for gasoline in the United States was increasing sharply, thanks to ever more gas guzzlers on the road and longer commutes. The administration also continued pumping 120,000 barrels a day of crude into the Strategic Petroleum Reserve, making a tight market even tighter. And by letting the value of the dollar fall sharply over the past year, the White House all but forced the Saudis to raise dollar-denominated oil prices to compensate.
The administration's more serious mistake was that as energy supplies tightened, it did nothing to reduce U.S. demand. A year when the United States was fighting a war in Iraq would have been an ideal time to ask the country to sacrifice a bit, to reduce its dependence on oil from the Middle East. Instead, the Bush administration let SUV Nation roll on.
Meanwhile, as Americans burned their energy, the Saudis subtly fiddled with the oil market. By keeping inventories low and encouraging a policy of "just in time" deliveries to refiners, they kept spot prices on a knife edge. The result was that OPEC, after years of powerlessness, became in effect a central bank for oil.
"U.S. policymakers are guilty of denial," says Roger Diwan, a managing director of PFC Energy, a Washington-based consulting firm. "Tighter specifications for refiners, runaway demand and supply bottlenecks have indeed created market tightness. Blaming the producers doesn't solve the problems created by contradictory U.S. energy policies over the last two decades."
Bush administration officials who talked blithely in the run-up to the Iraq war about replacing Saudi Arabia as the locus of the oil market should be forced to drink a barrel of crude. As things have turned out, events have underlined the inevitability of Saudi Arabia as the supplier of last resort. An administration that set out to transform the Saudi-dependent status quo has ended up reinforcing it -- at the very time that terrorist attacks are showing the kingdom's vulnerability.
Conspiracy theorists will see these developments in oil markets as further evidence of a plot between the House of Saud and the House of Bush. That's nonsense. What we are seeing in the market is a result of clever policies in Saudi Arabia and dumb ones in the United States. This "crisis" is man-made, and the more it resembles the oil-crisis frenzy of the 1970s, the more nervous we should all be.