Energy Secretary John S. Herrington said yesterday that Saudi Arabia is approaching "a point of diminishing return" in its effort to force lower oil prices through overproduction, and suggested that there will be "political implications" if the price war continues.
DOE officials said the remarks were intended as a signal to the Saudis that the time has come to stabilize oil prices, which have dropped more than 60 percent since December. The precipitous plunge has played havoc with the U.S. oil industry, which must match the world oil price, largely set through decisions by members of the Organization of Petroleum Exporting Countries (OPEC).
"It's got to be apparent to the Saudis and the rest of the Arabs that their production is causing some problems in our producer industries," Herrington told reporters in an informal briefing.
"There is a point where forcing prices or increasing production has political implications. The Saudis have a lot of friends in the world, and forcing prices down by excess production has ramifications among their allies."
DOE officials said Herrington was speaking as energy secretary, and that his remarks were not coordinated with the White House. The administration has held steadfastly to a hands-off policy on energy markets, a philosophy that Herrington repeated to a Senate hearing as recently as last week.
But his remarks were the first hint that the administration has had enough of a global faceoff that has reduced oil prices from $27 a barrel to less than $12 in the last three months, with disastrous results for U.S. producers.
Oil prices continued to slide yesterday, closing at $10.42 a barrel for the benchmark West Texas Intermediate crude on the New York Mercantile Exchange. That is the lowest level in eight years and more than $1 less than a barrel of crude brought last week.
For some domestic producers, $12 a barrel is considered the break-even point. Some energy analysts have predicted that prices could drop to as little as $8 a barrel the next few weeks unless members of OPEC and non-OPEC oil producers reach agreement on production limits.
Herrington discounted those predictions. "I think we're getting near the bottom," he said. "I'd be surprised to see it fall to levels much lower than where it is right now."
But current levels have the domestic industry reeling. "This is great for the nation, but it is a major debacle for oil-producing states," said energy analyst John Lichtblau of Petroleum Industry Research Associates in New York. "They are not just in a recession, they are entering a great depression."
The administration has been under pressure from oil-state members of Congress to ease the domestic impact of plummeting prices, although there is little agreement on what action the government should take.
Herrington acknowledged that the situation "has created severe problems for the American petroleum industry. Service companies, drillers, producers are all having troubles. Banks that loan the money are having terrible problems."
The administration is also concerned about the long-term impact on the U.S. economy, as domestic oil exploration declines and dependence on imported oil increases. Herrington said yesterday that the administration is reconsidering its decision to halt oil purchases for the Strategic Petroleum Reserve "as a national security matter and for economic reasons."
The reserve holds enough oil to supply the nation for 120 days, more than was envisioned when the program was established in the wake of the oil embargoes of the 1970s, and the administration has repeatedly attempted to halt purchases to ease pressure on the federal budget.
But a senior DOE official said that Herrington "wants to take another look at how much of an insurance policy the country needs."
Saudi Arabia and other Persian Gulf states triggered the oil-price war by boosting output last year in an effort to regain control of a market eroded by full-bore production from non-OPEC members and to force those non-members into production curbs.
Non-OPEC producers, including Britain, Angola, Egypt and Mexico, have declined to reduce production, and a round of OPEC talks aimed at shoring up prices ended last week without agreement. Talks are to resume in mid-April.
Saudi Arabia, the world's largest exporter, is blamed by many in OPEC for the collapse of the oil market. Between last summer and February, Saudi Arabia increased production from its rich oil fields more than 100 percent, from 2 million barrels a day to more than 4.3 million barrels a day.
In a dispatch yesterday from Bahrain, Reuter reported that Saudi Arabia reduced its output about 12 percent last month.
Quoting industry sources, the news service said the reduction had been expected for technical reasons, but that the Saudis may also have found the timing convenient to defuse criticism of their oil policy