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Saudi Arabia's move to keep oil flowing brings crude prices down

Energy traders were calmed by news that Saudi Arabia was in talks with European refiners to fill the gap caused by the disruption in Libya. When it comes to shoring up oil markets, the Saudis have put political grievances aside.

February 25, 2011|By Neela Banerjee, Los Angeles Times
  • Saudi Arabian Oil Minister Ali Ibrahim Naimi, right, and Prince Sultan ibn Abdulaziz in Riyadh, the capital city. Naimi said OPEC would be ready to produce more oil if needed.
Saudi Arabian Oil Minister Ali Ibrahim Naimi, right, and Prince Sultan… (Fahad Shadeed, Reuters )

Reporting from Washington — Crude oil prices pulled back from highs not seen since 2008 as leaders from Saudi Arabia to the White House offered fresh assurances that the world wouldn't run short of oil despite violence in the Mideast and North Africa.

Oil futures hit $103 a barrel in New York trading Thursday but ended the day at $97.28, down 82 cents. In Europe, oil also fell in electronic trading after nearing $120 a barrel.

Petroleum prices had surged on fears that political unrest in Libya, Egypt and other countries could reduce global supplies — pushing fuel costs higher and throwing the fledgling global economic recovery into reverse.

But energy traders were calmed Thursday by news that Saudi Arabia, the world's biggest oil exporter and OPEC's de facto leader, was in talks with European refiners to fill the gap caused by the disruption in Libya, which pumps about 2% of world oil consumption.

In addition, the International Energy Agency, a Paris-based energy advisor to industrialized countries, said it would tap oil reserves if needed. And the White House said the U.S. and other countries had the ability to act if world oil supplies were constrained.

Saudi Arabia's promises to rein in prices by boosting production might appear surprising given that its economy is almost entirely dependent on oil revenue. And Saudi leaders, finding themselves surrounded by unnerving populist revolts, have been frustrated that the U.S. seems sympathetic to the uprisings.

But the latest assurance makes public what the Saudis have been doing quietly since the fall: gradually increasing production to keep up with growing demand and to damp prices.

Like much of the rest of the world, the Saudis fear runaway oil prices. They understand that prices over $100 a barrel threaten to sap global economic growth and with it, demand for oil. With its vast reserves and infrastructure, Saudi Arabia is uniquely positioned to put a lid on prices, an imperative that politics so far has not derailed.

"They know their value to the world is as the central bank of oil," said F. Gregory Gause III, professor of political science at the University of Vermont. "They're signaling, 'Don't worry, we'll take care of it.' They like the high revenues but they want to make sure there is no crisis."

The Saudis have said repeatedly that they would provide more oil to the market, and by Thursday, they had made statements about being in "active talks" with oil companies to compensate for any Libyan shortfall. It's all an attempt to keep oil from soaring back toward the record $147 a barrel of July 2008.

"The fear premium is back and we're now talking real oil, real disruptions," said David Knapp, chief economist with Energy Intelligence Group, an industry analysis firm. "Libya is a significant source of petroleum products and natural gas going across the Mediterranean."

Over the last few years, Saudi Arabia has signaled to the market that it prefers that the price of oil stay in a sweet spot between $70 and $90 a barrel, and it is willing to pump or cut back to keep prices there. Though members of the Organization of the Petroleum Exporting Countries have official quotas for production, their actual output cannot be independently verified, which leaves room for countries to increase or decrease exports. Still, analysts often guess actual production, based on information from refiners and shipping companies.

The Saudis' official OPEC quota is about 8.05 million barrels a day, but analysts like Knapp estimate that the kingdom has pumped an additional 400,000 barrels a day since October to meet growing global demand as economies recovered.

Yet whenever tensions flare in the Middle East or relations with the United States sour, worries emerge that Saudi Arabia might use oil as a political tool as it did during the 1973 embargo.

Certainly, ties are strained now between the two countries. The Saudis were stunned by the Americans' swift disavowal of their 30-year alliance with Egyptian President Hosni Mubarak.

In an unusual public step, a Saudi official leaked to the Times of London details of a tense phone call between President Obama and King Abdullah in late January when the king warned the U.S. not to "humiliate" Mubarak and vowed that he would bankroll any American aid Egypt lost.

The king was angered "by our handling of it, on the obvious grounds that if you don't keep faith with your friends, you have no friends," said Charles Freeman Jr., a former ambassador to Saudi Arabia. "Of course we had a dilemma with Egypt, but the king has no reason to be sympathetic to it."

Still, the Saudis have kept oil apart from politics for decades now. The oil ministry is run by engineers and bureaucrats, not members of the royal family, giving it some distance from political concerns.

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