Al Jazeera questions Saudi figures

How much over OPEC quotas is Saudi Arabia producing? Their promises don’t quite add up.
Oil market outlook mired in confusion
By Adam Porter in France

Thursday 19 August 2004, 14:06 Makka Time, 11:06 GMT

When the oil market is under such pressure, statements by powerful players can have a significant impact on prices. Saudi Arabia and OPEC are no strangers to this game.

Looking back over the past months, some observers see the host of statements to the press as at best confusing and at worst politically motivated.

The recent announcement by Saudi Arabia that it plans to raise output by 1.3 million barrels per day (mbpd), was trumpeted across the media. Seemingly this announcement was to ease market pressure and prices. Yet the actual wording of the announcement is less clear.

Oil minister Ali Naimi said, “The kingdom is well prepared to meet all the requirements of the international oil companies if they need additional volumes.”

In the geopolitical world, where lawyerspeak dominates discussions, does this mean that Saudi Arabia is actually producing an extra 1.3 million barrels per day? Today? Or does it mean that they could produce an extra 1.3mbpd? Or that in the future at some point they might produce an extra 1.3mbpd?

There are fears that demand for
oil might be outstripping supply

Surely only the first interpretation is worthy of a press release to the world’s media, the other two are simple speculation. Because theoretically, with 130 billion barrels of “proven developed” reserves, Saudi Arabia could produce huge quantities of oil. This does not mean that they are producing, or will do so in the future.

Saudi desperation?

“I don’t know a single person who believes the Saudi line,” oil analyst Bruce Evers of Investec Securities in London told Aljazeera.net.

“The Saudis are desperately trying to dampen the price ahead of the [US] election in November. They are using all the cards up their sleeve.”

The announcement by Saudi Arabia overshadowed a near simultaneous release by the International Energy Agency (IEA). The IEA announcement was in the morning, the Saudi announcement in the afternoon. Of the same day.

The IEA report made less calming reading for the markets. They claimed that global consumption had risen by 2.4mbpd in 2004. In one year. And that next year, 2005, it was set to increase by another 1.8mbpd. A cumulative total of 4.2mbpd extra in just 24 months.

So where does Saudi Arabia’s “preparedness” to supply an extra 1.3mbpd fit into that equation? Why did Saudi release this idea to the press a few hours after the IEA report? Coincidence?

“It smacks of desperation on the part of the Saudis,” says Evers. “I have no sympathy with them. They were still reeling from the price drop of the late Eighties and as a result have underinvested in their production capacity. Now demand growth has caught them out.”

Pledges obscured

But if you think this one Saudi statement is a little confusing, then you are yet to enter the maze of predictions, announcements and statistics that further obscure both the Saudi and OPEC promises.

Frequent attacks on pipelines in
Iraq too have affected prices

On 3 June OPEC announced an increase of production. By 2mbpd from 1 July and then by a further 500,000 bpd from 1 August. Both deadlines have now been passed and the price of oil has not neither held at its June price of around $38, nor fallen. Instead it has increased to over $46. Yet all the extra irritants to the markets – Yukos, Iraq, Nigeria and so on – were very much around in June.

This would be destabilising enough if it were not for another OPEC release on 22 July in Vienna.

In addition to the two proposed increases in output, spokesman Indonesian Oil Minister Purnomo Yusgiantoro told the world’s press that OPEC was in fact “currently producing some 2mbpd above the agreed ceiling. This should not be seen as a violation of our production agreement, but instead as a positive … to the current market situation”.

Quota busting

So according to OPEC itself, its members are already quota busting. Which they say should “not be seen as a violation of our production agreement”. They say they are producing more than they agreed anyway.

So, does the 3 June announcement of an increase of 2.5mbpd include this quota busting? If it does that means that OPEC had huge, previously unstated, spare capacity. If so, why are prices still so high?

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