Tuesday, May 25, 2004

The Economist weighs in on OPEC, the G8 and oil prices.
At the next official meeting of OPEC, in Beirut on June 3rd, Saudi Arabia will be asked to demonstrate solidarity with its co-conspirators in the cartel. The bargain that holds OPEC together�each member shows restraint in production, so that all can enjoy higher prices�is at stake, they will say. But it is widely assumed that Saudi Arabia must also keep its side of a more fundamental bargain. It must be conscious of American petrol prices, especially in an election year, and, in return, the world�s only superpower will continue to offer the desert kingdom its protection. The other members of the G7 have rather less leverage, but they are promising to flex whatever diplomatic muscles they can find. Nicolas Sarkozy, France�s newish finance minister, in particular, is not one to sit still while others decide the fate of his economy. Those oil-producing nations with which France is most �easily in touch� will be hearing from him soon, he promised in New York.

Mr Sarkozy�s powers of persuasion and America�s promises of protection may be enough, for the moment, to keep the Saudis on side and the rest of OPEC quiescent. Oil prices of $50 per barrel no longer look an immediate prospect. But, by the same token, oil prices of $25 per barrel may, as the Venezuelans insist, belong to a bygone era. If the Chinese economy continues to grow and security fears continue to mount, there may be little anyone, in New Amsterdam or Old, can do.
The thing the General finds most odd in this passage is the assumption that the G8 has a great deal of weight to throw around regarding oil prices. They do not. Most of the smaller OPEC members are producing near or at full capacity, so shaking a stick at Venezuela (OPEC's #3 producer) or Libya (#7) won't do any good. With the West already in a complicated dance with Iran (OPEC's #2) to get the country to suspend its nuclear weapons program, piling demands for more oil on Iran (the most likely of the countries with which France is "easily in touch") as well is likely to backfire. That really leaves Saudi Arabia as the only significant player with enough spare capacity to throw into production in a pinch to make a real difference in the global market.

The Economist suggests the US has considerable leverage over the Saudis because of the "more fundamental bargain" between the two countries: oil for protection. Yet with the demise of Saddam, from whom exactly is the US now protecting the House of Sa'ud? From al-Qaeda? From its own subjects? I am unconvinced that the US can do much of anything to protect Crown Prince Abdullah and all his brothers, half-brothers, lackies, cronies and hangers-on from either.

In fact, higher oil prices are probably the best vehicle for the preservation of the House of Sa'ud in that it allows them to drown resistance and disaffection in a shower of petrodollars. Clearly the Saudis don't want to get too greedy and send the nascent recovery into a tailspin, but anything below $30/barrel seems increasingly unlikely.

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