By most measures, power in the Middle East remains a long way from anything resembling balance. The future of Iraq is uncertain. U.S.-orchestrated peace talks between Israel and its neighbors haven't progressed beyond angered posturing. To the north, newly independent republics of the old Soviet Union represent a possible source of instability. Iran is rearming even as it pursues international capital and technology.
For the oil industry, prospective power balances in the Middle East have more than academic significance. The war to oust Iraqi troops from Kuwait was just the latest reminder of how events in the region affect oil markets. Although a full year has passed since the conflict, questions of political influence and stability have no clear answers. A few possible scenarios appear in a special report article on p. 45.
One piece of the puzzle has fallen into place. It's the piece most crucial to oil markets: Saudi Arabia. Never before have Saudi intentions been more clear. The kingdom will do what it must to moderate crude prices, even if that threatens cohesion within the Organization of Petroleum Exporting Countries. By Saudi standards, this is a bold assertion of will-and a reasonable one.
RIPE OPPORTUNITY
OPEC had a ripe opportunity to raise the world price of crude oil last year. It didn't exercise the option because Saudi Arabia didn't want the price to climb. The world was producing crude oil at nearly capacity rates. A production cut of perhaps 2 million b/d might have sent the price up by several dollars per barrel. Throughout the year, however, the Saudis produced at rates that surprised nearly everyone, refusing recommendations for quotas or cutbacks in any form. Prices languished.
This year prices have fallen. At their meeting last month, OPEC ministers agreed to trim 1 million b/d from total production but couldn't agree on country quotas. Of course they couldn't. Saudi Arabia promised to produce at least 8 million b/d during the second quarter, rendering action by other members all but meaningless.
The kingdom has come under sharp criticism for this new independence streak. Some critics fault the Saudis for disrupting the producers' group, as though misbehavior were something new among Middle Eastern oil exporters. Especially in the U.S., suspicions run high about a Saudi agreement with the Bush administration to suppress prices until after elections next November.
In fact, there's a simpler and much more likely explanation for Saudi Arabia's conduct in the oil market during the past year. For the Saudis, producing at near capacity, holding prices a couple of dollars below the top of their well established comfort range, simply makes good economic sense.
SAUDI INTERESTS
Yes, the Saudis might have boosted revenues some by slashing production to raise the oil price while Kuwait and Iraq were still out of business. But they know that Kuwait is rebuilding production and that at some point Iraqi crude will return to the market. For the Saudis it will be better at that point to be producing 8 million b/d and have demand growing than to be producing 5-6 million b/d and have demand slumping from a manufactured price hike.
Saudi Arabia's leaders attend to the long term more than many other producers do. They make their wishes accordingly in the oil market. And they can make their wishes come true most of the time. Especially when politics are fuzzy, it's worth remembering that Saudi Arabia possesses 39% of the Middle East's oil reserves and 25% of the world's. Some aspects of power in the Middle East never change.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
