Saudi Arabia sought to calm turbulent oil markets yesterday by offering to boost production, but after an initial drop in prices the cost of oil rose again by day's end.
The Saudis' failed attempt to jawbone prices lower suggests to many industry specialists that current conditions -- production at near capacity, surging demand and fears of terrorism -- are curtailing the long-established power of the kingdom in international markets.
"In a sense, it's a perfect storm," said Fareed Mohamedi, chief economist for PFC Energy, a District-based consulting firm. "Many factors have just all come together and pushed the Saudi ability to the wall."
Rising oil prices have become an issue in President Bush's reelection. The U.S. Federal Reserve on Tuesday blamed the run-up in oil prices for the recent sharp slowdown in the economy.
Democratic presidential candidate John F. Kerry has raised concern that U.S. dependence on oil from Saudi Arabia, the world's largest exporter, leaves the United States vulnerable. At last month's Democratic convention, Kerry drew sustained applause when he declared, "I want an America that relies on its ingenuity and innovation, not the Saudi royal family."
The question of the Saudis' sway in world oil markets has assumed a role in the U.S. presidential election this year. Author and Washington Post assistant managing editor Bob Woodward stirred a political controversy several months ago when he reported in a book that the Saudi ambassador to the United States, Prince Bandar bin Sultan, told Bush that the Saudis would "fine tune" oil prices to boost the U.S. economy before the presidential election.
Adel Jubeir, foreign affairs adviser to the Saudi crown prince, said in a conference call with reporters that yesterday's announcement was not intended to influence the political campaign. He dismissed the assertions in Woodward's book as "fiction."
"Our policy is to maintain prices at a moderate level," he said.
Saudi officials said the pledge of increased production was motivated by concerns that oil prices were too high and could depress the world economy and lead to a decline in demand.
White House spokesman Trent Duffy would not discuss the Saudi announcement, saying only that the administration works with oil-producing countries to ensure adequate oil supplies.
The Saudis said they could immediately produce an additional 1.3 million barrels a day of crude oil beyond the 9.3 million barrels they now pump, if needed. The government said that at least for now it would not expand production because its customers had not asked for more oil.
As word of an imminent Saudi announcement reached traders on the New York Mercantile Exchange yesterday morning, the price of benchmark U.S. crude oil for September delivery dropped by more than $1 per barrel. Traders said they originally thought there would be a flood of new oil on the market.
But prices later rose as traders dissected the Saudi statement and questioned how much capacity actually exists to produce the type of crude oil most easily processed into gasoline. The closing price of a 42-gallon barrel of oil was up 28 cents from Tuesday, to $44.80 per barrel, a near record. Adjusted for inflation, prices are below peaks in 1990.
Some analysts said they believed the Saudis could produce an additional 1.3 million barrels a day, while others were doubtful. But analysts in both camps said much of the additional oil likely would be a variety that is more difficult to convert to gasoline because of limited refinery capacity.
Meanwhile, other events are driving prices up. Demand has increased, mostly in China and the United States. The Paris-based International Energy Agency, which advises the United States and 25 other countries, increased its projections for oil demand for the rest of this year and next year. The agency said it had underestimated oil use for years.
The report said the current prices were a concern and are causing "economic damage."
Traders are fearful of supply disruptions resulting from terrorism or instability in several oil-producing countries. Yukos Oil Co., Russia's largest exporter, announced yesterday that it may have to halt production in one of its units because of a government freeze on its bank accounts, part of an ongoing dispute.
Moreover, as the Saudis reach their capacity, traders become more nervous because even less spare oil would be available in an emergency.
The rising price of crude oil in recent months has also pushed up the price of gasoline. Although retail prices have moderated recently, analysts expect prices to start rising again. The national per-gallon average price for regular gas was $1.865 yesterday, according to a survey by a contractor for the AAA automobile club. That is down several cents from a month ago but up from a year ago.
Analysts and traders said they were disappointed that the Saudi announcement lacked specifics. For example, in the conference call with reporters from Saudi Arabia, the foreign adviser could not identify which fields the additional crude could come from. In addition, he could not specify the type of crude oil that could be produced. A U.S. public relations firm working for the Saudis, Qorvis Communications LLC, also was unable to provide the information.
The Saudis do not release detailed information about oil production and capacity. Analysts cobble together estimates based on observations about oil tanker traffic and load along with other measures.
Matthew R. Simmons, chairman and chief executive of Houston-based Simmons & Co. International, an energy investment bank, said he did not believe the Saudi numbers. "They're basically lulling a lot of people into saying, 'We don't have anything to worry about,' " Simmons said.
Simmons said his conclusions are based on an analysis of data from technical papers and annual reports from Saudi Aramco, the national oil company, along with other information.
But James Burkhard, director of global oil markets for Cambridge Energy Research Associates in Massachusetts, said his firm believes that the Saudis can produce the extra 1.3 million barrels a day and that more than half of the additional production may be of the most desirable variety.
The fact that the Saudis did not disclose specifics of possible production alarmed traders.
"That creates doubt in people's minds," said Raymond Carbone, president of Paramount Options Inc. "I'm skeptical of the Saudis, and I think the market is going to stand firm."