Saudis break from past oil policy
Here’s one of the most important puzzles of global oil security: Since the late 1970s, Saudi Arabia has pumped the market with oil, fearing that high prices could hurt global growth, reduce demand for Saudi oil, and anger its protector, Uncle Sam. Now, oil has
almost doubled in one year to more than $90 a barrel, and the Saudis have barely lifted a finger despite the fear that high oil prices could increase the likelihood of an American, and therefore a global, recession. Why? The answer may define oil in the 21st century - or at least underscore the reasons for the United States to seek greater oil independence.
The Saudis may have been thinking in the past year that the American and global economy could tolerate $90 oil. Until now, the global economy has been growing, and the US economy has avoided recession in spite of months of very high oil prices. However, on his recent trip to the Middle East, President George Bush pushed the subject. The Saudis noted that the weakening United States economy is a valid concern, but they remain reluctant to increase oil supply.
Oil producers say that high prices are partly due to speculation in oil markets as well as to the dollar’s decline, and not because oil is lacking. That may be true, but the high price, whatever the cause, remains a big problem. Saudi Arabia’s reluctance to address sustained high oil prices, even in the face of a potential recession, represents an important break with past Saudi oil policy.
Another explanation for no action could be that the Saudis may not want to look an oil horse in the mouth. Saudi Arabia’s young population has nearly tripled since 1980, while oil export revenues in real terms have fallen by around one-quarter (despite recent increases). Each Saudi gets 72 per cent less in trickle-down money today than in 1980. The nation needs oil export revenues to maintain high levels of subsidies (for food, fuel and other commodities) to sustain the population and to build massive infrastructure. Those funds help soothe a population that suffers from 13 per cent unemployment.
Then there’s the threat of global warming, which is pushing oil consuming nations to find other ways to produce energy. A mentality of “the future is now” may be developing in oil-rich countries. The Saudis have massive oil reserves, but these will be worthless
in the future if the world finds a way to use biofuels, batteries, or other fuel to power cars.
So the notion may be to cash in on high prices now. There is at least a minor possibility of something more ominous affecting the Saudi decision: The Saudis have been quiet because they are getting global markets ready for the possibility that they may not have enough oil to be a long-term fuel pump to the world.
The Saudis and OPEC once again decided not to raise oil production last week. That’s unfortunate. Though a 1970s-style, oil-triggered recession marked by stagflation - stagnation plus inflation - does not seem likely, high oil prices will contribute to any looming United States and global recession. Whatever their reason for not acting, the Saudis’ behaviour throughout the past year indicates that we are in a new oil policy ballgame.
It’s one that should give the United States reason to hasten its efforts to achieve greater oil independence. — The Christian Science Monitor