Saudi Oil, OPEC's Ire

Saudi Oil, OPEC's Ire
Saudi King Abdullah wants to bring prices down to ensure long-term demand, but other OPEC ministers disagree
by Stanley Reed
BusinessWeek


It happens almost like clockwork. A few days before the end of every month, marketing executives from Saudi Aramco, Saudi Arabia's national oil company, ring up the likes of ExxonMobil (XOM) and Royal Dutch Shell (RDS), sounding them out about the oil they need and the price they would be willing to pay. The Saudis crunch the numbers, set a price, then call the global customers back to see how much they'd be willing to buy. By the 10th of the following month, customers—there are about 80 in all—are told how much crude they'll actually get.

It's all part of an elaborate dance that goes on continually at OPEC's biggest producer. While the cartel may set production quotas for each member, the Saudis and a few other top suppliers frequently exceed those limits in order to meet world demand. And these days, the dance looks more like a tug-of-war, as the Saudis and their allies in the organization seek to contain crude prices while Iran and others want to keep them as high as possible. Saudi relations with OPEC "depend on where prices are; when prices are too high [the Saudis] side with consumers," says Vera de Ladoucette, senior director of consultancy Cambridge Energy Research Associates in Paris.

WARY OF HIGH PRICES
The tug-of-war is a key factor in the extraordinary volatility in prices lately. After soaring to $147 per barrel this summer, crude plummeted to below $90 in early September. On Sept. 22 it jumped again to $130 as traders scrambled to cover short positions and fretted about the U.S. economy, then fell to $107 as those pressures eased.

Why wouldn't the Kingdom want to squeeze the maximum out of customers? The Saudis have long memories and recall how high prices can cut into consumption; it happened in the 1980s and it's happening again now. Any threat to oil's leading role as a source of energy is a big worry for a country that sits on reserves of some 260 billion barrels. "We are concerned about the permanent destruction of demand," says a senior Saudi official. "Those who buy hybrid vehicles are not going back to SUVs."

OPEC hardliners such as Iran and Venezuela, by contrast, have less oil in the ground and are running short on cash, so they're more interested in maximizing revenues today. Friction within OPEC has been growing because Saudi Arabia has been pumping almost 10% more than its OPEC quota of 8.9 million barrels per day. The Saudis and other Persian Gulf states believe a price of $90 per barrel is about right, while the hardliners don't want to see anything less than $100 per barrel. "The current market is not balanced; it is oversupplied," Iranian OPEC representative Mohammad Ali Khatibi told Reuters.

Talk to the Saudis privately and they often express frustration with OPEC. Saudi negotiators complain that some members come to meetings with rigid political positions that don't take the real world into consideration. And the Saudis dismiss the likes of Venezuela and Iran for talking big without having the oil to back it up. Venezuela can't produce its quota of 2.5 million barrels per day, while Iran struggles to pump its 3.8 million. Only the Saudis have significant unused capacity that they can tap to influence the markets, and they are working to add to this margin.

The conflict flared this summer. Fearing that sky-high prices could blight oil's future, King Abdullah convened a conference of energy ministers and oil executives in the port city of Jeddah on June 22. At the meeting, the Saudis unilaterally announced a 200,000-barrel-a-day hike in production, on top of an increase of 300,000 barrels daily a few weeks earlier, annoying others in the producers' club. Algerian oil minister and current OPEC President Chekib Khelil called reporters to his hotel room to say he saw no need for the Saudi move.

It's clear the Saudis and Khelil don't see eye-to-eye. At a Sept. 9 OPEC conclave in Vienna, the Saudis went along with vague language promising a cut. But after the meeting they put out the word that they didn't feel bound by it. Khelil, meanwhile, held a 4 a.m. press conference at which he said the agreement required OPEC to cut output by 520,000 barrels per day—apparently violating an agreement with the Saudis, who would bear the brunt of any cut, not to mention a specific number.

The Saudis aren't about to abandon OPEC. But when it comes to pumping what the world needs to keep going, they will generally deliver what their customers want even if it goes against other members' wishes—which likely means more conflict in the producers' club. The Saudi production increases, says Christophe de Margerie, CEO of French oil giant Total (TOT), "are a coup de knife in the OPEC system."

ASPO-USA Prediction

The following was taken from an article by Dave Cohen of ASPO-USA:

Saudi Aramco Update

Business Week published Saudi Oil: A Crude Awakening on Supply? on July 10, 2008. Steve LeVine's story should leave us with no doubt about what to expect from the Kingdom in coming years. Mysteriously, this story was not Front Page News in every media outlet all over the world.

IMAGE:Businessweek Saudi Fields projections to 2013
Important

Business Week received a "detailed document obtained from a person with access to Saudi oil officials." The new information simply confirms what I already knew, but independent confirmation helps us reach firm conclusions. PFC's Roger Diwan, a respected oil analyst, vetted the Business Week document.

The data describes Saudi maximum sustainable capacity (table above). Capacity remains around 12 million barrels per day (b/d) for the next 5 years. An important shift occurs which should give us all pause.

One dramatic part of the data concerns a site called Ghawar, which has been the kingdom's workhorse field for decades. It shows the field producing 5.4 million barrels a day next year, but the volume then falling off rapidly, to 4.475 million daily barrels in 2013. "That's why Khurais is so important—to make up for that decrease," said the oil industry executive who released the data.

The long anticipated decline ("twilight") of Ghawar, the world's largest oil field, is reflected in the Saudi Light data (blue circle). If these numbers are accurate, Ghawar output declines 17% between 2009 and 2013. This works out to about 4%/year for each of the next 5 years. Production of "good oil"—not Manifa heavy sour oil (gray circle)—to offset these declines is supposed to come from Shaybah.

Though 2014 is not included in the data, one of the fields listed—Shaybah—is to have a volume increase to 1 million barrels a day that year, from 750,000 barrels a day from 2009 to 2013, according to the oil executive.

Simple arithmetic tells us that additions from Shaybah after 2013 will not offset Ghawar declines for more than one year. Business Week's source indicates that 10.4 million b/d is Saudi Arabia's maximum sustainable production level between 2009-2013. This number confirms what I wrote in The Saudis Are Blowing Smoke Again (ASPO-USA, March 12, 2008). Whether the Kingdom will actually produce at their maximum sustainable capacity is another question. See Sleepwalking Toward the Oil Precipice to learn about setting correct expectations about OPEC production in the coming decade (ASPO-USA, April 30, 2008). This passage is from Blowing Smoke—

Khurais and Manifa are very likely the last large (about 1 million b/d) increments that Saudi Arabia will be able to put on-stream—ever. A "paradigm shift" means the Kingdom is not going to knock itself out raising crude oil production to (best case) levels beyond 10.5 million b/d in the medium term out to 2012 or so, and will likely not be able to do so thereafter—Ghawar will not last forever, despite what Mr. al-Naimi or CERA think. Investment in additional capacity available after 2011 would have to be on the drawing board now, but there is no indication that Saudi Arabia has thought that far ahead.

[I should add now that Khurais and Manifa must meet capacity expectations for the Business Week scenario to come true. Also, most Manifa oil will likely be refined in Saudi Arabia, not exported. The Saudis will export refined products beyond what they use themselves.]

The Saudi peak is now in sight. Saudi Arabia is the only OPEC member that can raise production by any significant amount in the medium-term to 2013. The longstanding argument about the Saudis is over.

Saudi Arabia Pumps 9.53 mbpd in June

Oil Trades Near Record as Investors Seek Alternatives to Stocks
By Christian Schmollinger
July 4 (Bloomberg)

Crude oil traded near a record in New York above $145 a barrel, set for a second week of gains, as investors purchased commodities as an alternative to flagging equities markets.

Oil has risen 19 out of 27 weeks this year as money managers bought crude futures rather than U.S. stocks, which yesterday completed the longest streak of weekly declines in four years. The International Energy Agency said July 1 that spare OPEC capacity will shrink by 2013, keeping the market ``tight''.

The Organization of Petroleum Exporting Countries increased production 1 percent in June, as Saudi Arabian output rose to a two-year high, a Bloomberg News survey showed.

OPEC pumped an average 32.52 million barrels a day in June, up 320,000 barrels from May, according to the survey of oil companies, producers and analysts. May output was revised down by 80,000 barrels a day. Output by the 12 members with quotas, all except Iraq, rose 380,000 barrels to 30.09 million barrels.

Saudi Output

Saudi production increased 280,000 barrels to an average 9.53 million barrels a day last month, the highest since March 2006. It was the biggest gain among OPEC members last month and represented 88 percent of the overall OPEC increase.

The world has as much as 5 trillion to 7 trillion barrels of oil yet to be developed, located in ``challenging'' areas or acreage closed to exploration, Saudi Arabian Oil Minister Ali al-Naimi said.

``The limits to future supplies have more to do with politics than with geology and resource availability,'' al-Naimi said in Madrid, speaking at the World Petroleum Congress, where he is receiving an industry award. Concern over supply can be overcome by allowing ``explorers to explore and find hydrocarbons where they aren't allowed,'' he said.

Khurais

Giant Saudi field is key to boosting oil output
Remote Khurais project should be supplying crude by June of next year
The Associated Press
June. 29, 2008

This massive oil field surrounded by the desolate sands of Saudi Arabia's vast eastern desert feels like the middle of nowhere.

But what happens over the next year at Khurais, one of Saudi Arabia's last undeveloped giant oil fields, could hold the key to what drivers will pay at the pump for years to come.

Under way at Khurais and two other smaller fields nearby is what Saudi Arabia calls the single largest expansion of oil production capacity in history.

With consumers howling over record fuel prices and the United States pushing Saudi Arabia to produce more oil, this patch of sand 100 miles west of the Saudi capital of Riyadh has become one of the most important places in the world economy.

Saudi Arabia's state-owned oil company, Aramco, is spending $10 billion to build the infrastructure to pump 1.2 million barrels of oil per day by next June from the Khurais field and its two smaller neighbors. That alone would be more than the total individual production of OPEC members Qatar, Indonesia and Ecuador.

The project forms the centerpiece of the Saudi plan to increase the total amount of oil it can produce to 12.5 million barrels per day by the end of 2009 — up from a little more than 11 million barrels per day now.

Consuming nations have pushed Saudi Arabia to boost production capacity even further and also want the world's top oil exporter to begin pumping more crude immediately to bring down record oil prices hovering near $140 a barrel. They say oil production has not kept up with increased demand, especially from China, India and the Middle East.

Saudi Arabia plans to produce 9.7 million barrels of oil per day, or 11 percent of the world's total, in July. It is the only nation with significant excess capacity that it could put on the market quickly.

But the kingdom has resisted calls to increase production further, saying financial speculators and the falling dollar are to blame for high oil prices, not a shortage of supply.

These disagreements came to a head June 22 at a rare meeting of oil producing and consuming nations hosted by Saudi Arabia. In the end, Saudi Arabia said it could increase oil production capacity to 15 million barrels per day if needed in future years. But it gave no indication that step, or an immediate increase in output, was necessary or planned.



The political tussle over output masks the challenge Saudi Arabia faces in boosting production capacity by developing giant fields like Khurais.

"That is what people don't appreciate," said Manouchehr Takin, an oil expert at the London-based Centre for Global Energy Studies. "These are major projects, and people don't realize they aren't that easy."

The Saudis estimate Khurais and the nearby smaller Abu Jifan and Mazalij fields hold a total of 27 billion barrels of oil encased in solid rock 5,000 feet below the baking desert.

Saudi Arabia is no stranger to developing giant oil fields. Its massive Ghawar field, with an estimated 70 billion barrels of remaining reserves, is the world's largest.

But oil experts say Khurais, which was discovered in 1957, is geologically more difficult to tap.


Aramco is using hundreds of mostly South Asian workers to build a massive processing facility at the field. More than 150 wells will pump crude to the surface, where water and gas will be separated out. The oil then will be funneled to the country's east-west pipeline for delivery to ships in the Red Sea.

Workers are also building a huge sea-water injection system to pump more than 2 million barrels of water per day from the Gulf into 120 wells. That will maintain the necessary pressure underground to push the oil to the surface.

Disputes over Saudi's decisions aside, "when you talk about the fields and the engineers and so on, I think you have to respect their technical ability," Takin said.


With its twisting maze of metal, the half-finished facility rises out of the desert like a massive space station. Workers wear gloves and wrap bandanas across their faces to hide from the searing sun as they work 10-hour shifts in temperatures well above 100 degrees.

Aramco officials say that in addition to geological challenges, they also face difficulty finding enough qualified workers and equipment. The project will use 145,000 tons of steel — almost enough to build two Golden Gate bridges.

"We are trying to do it in a world market where contractors are in high demand," said Muhammed al-Rubeh, head of Aramco's project department.

When completed, the processing facility also will be protected by two layers of fences, crash barriers, security cameras and government forces, Aramco says. Al-Qaida has called for attacks against Saudi Arabia's oil facilities to disrupt the flow of crude.

Aramco officials insist that despite the tight construction market, the Khurais project will be ready to produce 1.2 million barrels per day by next June.

But equipment and labor shortages have delayed production at another field, Khursaniyah, which was originally scheduled to begin pumping 500,000 barrels per day at the end of 2007. Aramco officials now say Khursaniyah will come online in August.

Also in the works is the development of the Manifa field, which sits offshore in the Gulf and is Saudi Arabia's only other giant oil field still untapped.


If all goes as scheduled, Aramco forecasts more than 50 billion barrels of fresh reserves from the giant fields by 2011. That amount alone would give Saudi Arabia the ninth largest oil reserves in the world, not even counting its existing reserves.

Outside analysts estimate the kingdom's total current reserves at about 260 billion barrels. But Saudi Arabia refuses to provide detailed data to allow independent verification.

Amin Nasser, senior vice president for production and exploration at Aramco, acknowledges the company sometimes faces criticism for that secrecy. "We have a tradition of letting our actions and accomplishments speak for themselves," he said.

URL: http://www.msnbc.msn.com/id/25443913/

Mixed Signals

Saudis See No Reason to Raise Oil Production Now
May 16, 2008
Rigzone

Saudi Arabian leaders made clear Friday they see no reason to increase oil production until their customers demand it, apparently rebuffing President Bush amid soaring U.S. gasoline prices.

During Bush's his second personal appeal this year to King Abdullah, Saudi officials stuck to their position that they are already meeting demand, the president's national security adviser told reporters.

"What they're saying to us is ... Saudi Arabia does not have customers that are making requests for oil that they are not able to satisfy," Stephen Hadley said on a day when oil prices topped $127 a barrel, a record high.

The Saudi government indicated that it is willing to put on the market whatever oil is necessary to meet the demand of its customers, Hadley said.

But even then, he said, Saudi leaders say increased production would not dramatically reduce pump prices in the United States.

The Saudis are investing in ways to increase oil production over time. Officials told Bush they are doing "everything they can do" for now to address a complicated market.

Hadley said the Bush administration will take the explanation back to its own experts and "see it if conforms."

When Bush and Abdullah met in the kingdom in mid-January, the president also sought more Saudi output but got a chilly response to that plea. Saudi Arabia said it would increase production only when the market justified it and that production levels appeared normal.

Bush acknowledges that raising output is difficult because the demand for oil -- particularly from China and India -- is stretching supplies. Also, economists say prices are being driven up by increased demand, not slowed production.

...

Saudi Hikes Output by 300,000 bpd in May
May 16, 2008
Rigzone

Contrary to earlier reports, Saudi Arabia has increased its oil production by 300,000 barrels per day in response to orders from customers, mostly from the United States, and will pump 9.45 million bpd in June, Oil Minister Ali al-Nuaimi said on Friday.

"Every month, we receive (orders) from our customers worldwide. On May 10 we increased our response to our customers by 300,000 barrels because they asked for it," Nuaimi told reporters during a visit by U.S. President George W. Bush to Saudi Arabia.

He said additional demand came from about 50 customers, mostly U.S. clients, "and we responded to it on May 10."

"Our production for June will be 9.45 million barrels per day," he added.

Al-Naimi

No Need for Further Saudi Oil Capacity Expansion — Al-Naimi
Reuters
ROME, 20 April 2008

Top oil exporter Saudi Arabia has no plans to embark on further capacity expansion as long-term oil demand forecasts fall and alternative fuel supplies rise, the Saudi oil minister told industry newsletter Petroleum Argus.

The holder of the world’s largest oil reserves sees no need to go beyond its 2009 capacity target of 12.5 million barrels per day “at least up to 2020,” Minister of Petroleum and Mineral Resources Ali Al-Naimi said.

Long-term future energy demand forecasts have fallen sharply, he said in the interview given to the weekly on April 11, casting doubt on the need for more Saudi oil.

Demand forecasts have fallen as low as 106 million bpd in 2030, down from previous estimates as high as 130 million bpd. The world currently consumes around 86 million bpd.

“The projection of demand is on the decrease,” Al-Naimi said. “The projection of alternative fuels is on the rise. Therefore, it behoves us to pause, instead of expending unnecessary funds on expanding capacity that will probably not be needed,” he said. “We will watch what happens in the coming years. It is a pragmatic position.”

Saudi Arabia has spent tens of billions of dollars on projects to meet growing world demand and maintain spare production capacity of 1.5 million-2.0 million bpd to deal with any unexpected outages in global supply. The Kingdom has previously said it could take output capacity of 15 million bpd.

The Kingdom is the only oil producer with substantial spare capacity that can be brought online quickly.

“We are idling at around 9 million bpd and we will reach capacity of 12.5 million bpd by 2009,” Al-Naimi said. “That is substantial spare capacity. As far as I know, all the latest projections, at least up to 2020, do not require anything higher than that.”

A Saudi oil official said earlier this month that output stood at around 9 million bpd. Current capacity is around 11.3 million bpd.

Al-Naimi said the oil market did not need more oil and crude inventories were “fairly high”.

“Today there is no reason to jump up and down and say ‘we will supply more crude’ — because that request from consuming countries is probably politically driven rather than a fundamental requirement,” he said.

British Prime Minister Gordon Brown this week said he wanted to see collective action to persuade the Organization of the Petroleum Exporting Countries (OPEC) to boost output and bring down prices. US President George Bush has also repeatedly urged OPEC to supply more oil.

But boosting Saudi oil output would destabilize the market, Al-Naimi said.

“We would be flooding the market,” he said. “The market cannot handle it, there is no demand.”

The price of oil was divorced from oil market fundamentals, Al-Naimi said. Oil has become a hedge for investors, like gold, against the falling value of currencies, he added.

“That is the reason for the pressure on the price of oil,” he said.

US crude hit a record of $117 a barrel on Friday.

Rising costs for materials, construction and oil service contracting has pushed up the cost of adding new oil output capacity in Saudi Arabia to between $5000 and $8000 per barrel, Al-Naimi said.

Capacity additions at the Shaybah oilfield, where state oil firm Saudi Aramco is adding 250,000 bpd to current capacity, cost around $5000 per barrel he said. At the giant Ghawar field, additional capacity costs were around $2000 per barrel.

Costs for new refineries had almost doubled from initial estimates, Al-Naimi said, although he did no refer to any specific plants. The cost of new joint venture refineries between Aramco and France’s Total and US major ConocoPhillips has risen above $10 billion from initial estimates of $6 billion, industry sources have said.

The highest depletion rates at Saudi oilfields were around 2-3 percent per year, Al-Naimi said. Reservoir management and drilling prevented higher decline, he added. Decline rates at existing wells were around 6-8 percent per year.

The only capacity addition that Saudi Arabia has detailed beyond 2009 is the 900,000 bpd Manifa field, which is to replace decline at other fields, Al-Naimi said.

“Manifa is really a ‘maintain potential’ facility, Al-Naimi said. “It does not add to our spare capacity.”

Saudi King says keeping some oil finds for future

Saudi King says keeping some oil finds for future
04.13.08
Reuters

Saudi Arabia's King Abdullah said he had ordered some new oil discoveries left untapped to preserve oil wealth in the world's top exporter for future generations, the official Saudi Press Agency (SPA) reported.

"I keep no secret from you that when there were some new finds, I told them, 'no, leave it in the ground, with grace from god, our children need it'," King Abdullah said in remarks made late on Saturday, SPA said.

The U.S. President George W. Bush in January urged the Saudi king to help tame soaring prices by encouraging OPEC to pump more oil. On separate trips to Saudi Arabia this year, the U.S. energy secretary also asked for more oil, while the vice president discussed high prices with the king.

The kingdom has spent billions on building over 2 million bpd of spare crude capacity and is the only country in the world able to bring online large volumes of crude supply quickly to deal with unexpected supply shortages.

OPEC held production steady at meetings in February and March despite calls for more oil from the U.S. and other consumers. OPEC officials blame the high price on factors beyond the group's control such as the weak dollar, investment flows into commodities and speculation. Saudi Oil Minister Ali al-Naimi said last week that global oil markets were well supplied and there was no need to put more oil on the market, despite prices hitting a record of over $112 a barrel last week.

Saudi Arabia has trimmed its output to around 9 million bpd to reflect lower customer demand, a Saudi oil source said on Friday. The kingdom had in previous months pumped around 9.2 million bpd. Crude demand traditionally dips at this time of year after the end of winter as refiners carry out maintenance and prepare to meet summer demand.

Saudi production capacity stands at around 11.3 million bpd, and is scheduled to rise to 12. 5 million bpd next year. (Editing by Will Waterman)

Saudi Oil Minister Says “Not Enough Buyers”

Saudi Oil Minister Says “Not Enough Buyers” to Increase Production
By Tom Waterman
April 10, 2008
Oilintel.com

Paris, France - On the sidelines of an international conference in Paris this morning, it was widely reported that Saudi Arabia's Oil Minister Ali Al-Naimi said "there were not enough buyers of oil to justify an increase in oil production, despite high prices."

This is a direct and accurate statement from the Saudi oil minister, but his next comment is even more telling. He said "that if more buyers emerged, then 'we' would sell. But there were no such buyers."

If you have followed OPEC for the past 30 years as we have, you would understand his logic. Frankly, OPEC will sell all the oil it can, if there are willing buyers. The fact is, Al-Naimi should have told reporters what he told VP Dick Cheney recently. He informed Cheney that they have no room to put any increased output. There are not enough buyers for the oil produced by OPEC and non-OPEC producers, much less if more oil was produced.

Other OPEC nations continue to produce, but they won't admit it. Reports that OPEC produced 100,000 bpd less oil in March than in February is a smokescreen. They certainly produced the same or more, they are just storing the excess until the market might need it, which they hope will be later in April or in May as refineries worldwide start gearing up for the summer driving season.

That's the hope. The reality is this self-defeating marketplace is overflowing with crude oil and even in normal times it might take until the end of June to right itself. With today's dynamics, it might not be resolved during the driving season at all.

That's why the Saudis refuse to pump more oil. What the market will not admit is that the reason OPEC did not officially cut production in the second quarter was due to high prices, and how bad the PR would be.

In our weekly editorial meeting, we could not come up with a time when oil fundamentals were as weak as they are today. And we're talking many decades of experience. Oil stored on vessels, all land-based storage facilities bulging, a series of geo-political factors that provide artificial support without ever removing a barrel of oil from the market.

Perhaps it will take the collapse of the U.S. economy, which is on the horizon unless energy and food prices fall, for the U.S. government to radically change and enhance the regulations that govern commodities and speculation. Increasing the cost of speculation will not solve the problem, only forcing out smaller traders. The large financial institutions that have the biggest stake, and are taking billions in profits can afford any increases. The answer is speculative limits on both the exchanges and the companies that manage these speculative funds. They must find a way to limit how much influence these firms have on baseless prices increases for profit.

Commodity markets are all tremendously affected. Grain tightness does not justify the price of corn, wheat, soybeans or other crops to double, triple and quadruple in price. The oil markets are fundamentally weak, yet prices rise. These financial institutions sell the dollar based on perceptions the Fed may keep lowering interest rates, and buy oil as a hedge. The result? A weaker dollar and justification for higher oil prices. If it were not such a dire situation, it would be comical.
Three years ago, a statement similar to the one uttered by the Saudi oil minister this morning would have sent crude oil crashing, by perhaps $1.50 per barrel, which based on the changes in perception and volatility, would mean about $6.00 per barrel today.

These speculative firms keep the cycle of greed alive and growing while at the same time, sending the U.S. economy into a death spiral. I wish I were exaggerating, but I'm not. I just won't use the "D" word just yet. We were using the "R" word in October, 2007.

Saudi Arabia Output Above OPEC Quota

Saudi Arabia Output Above OPEC Quota, Al-Naimi Says
By Maher Chmaytelli and Alexander Kwiatkowski
March 5
(Bloomberg)

Saudi Arabia, the world's biggest oil exporter, is producing above its OPEC quota because the market needs more crude, Oil Minister Ali al-Naimi said.

Saudi Arabia is producing 9.2 million barrels a day of oil, al-Naimi said today in an interview in Vienna, where the Organization of Petroleum Exporting Countries is meeting to decide production targets. Bloomberg calculates that Saudi Arabia has a production target of about 8.9 million barrels.

``That's what the market needs,'' he said.

OPEC will study the ``fundamentals'' when deciding what to do with production and customers aren't indicating that demand for oil is weakening, he said.

``Our aim is to keep supply and demand balanced with stocks standing at 5-year average,'' al-Naimi said. The Saudi minister earlier told al-Hayat newspaper that a change to production isn't justified because supply and demand are stable.

Al-Naimi said he wouldn't be ``surprised'' if OPEC held an emergency meeting before it meets again in September. ``The aim would be to ensure market balance,'' he said.

OPEC will leave production targets unchanged at today's meeting, according to 10 of the group's 13 members. Representatives including ministers from Iran, Venezuela and Algeria have told Bloomberg that the Organization of Petroleum Exporting Countries will hold output steady.

The Construction Site Called Saudi Arabia

The Construction Site Called Saudi Arabia
By JAD MOUAWAD
January 20, 2008
The New York Times

RABIGH, Saudi Arabia — The alarm bell sounded the end of the lunch break here one November afternoon, and suddenly thousands of workers — on foot, on bicycles and in buses — streamed in, seemingly from out of nowhere, and jolted this huge construction site to life.

Amid a forest of cranes, towers and beams rising from the desert, more than 38,000 workers from China, India, Turkey and beyond have been toiling for two years in unforgiving conditions — often in temperatures exceeding 100 degrees — to complete one of the world’s largest petrochemical plants in record time.

By the end of the year, this massive city of steel at the edge of the Red Sea will take its place as a cog of globalization: plastics produced here will be used to make televisions in Japan, cellphones in China and thousands of other products to be sold in the United States and Europe. Construction costs at the plant, which spreads over eight square miles, have doubled to $10 billion because of shortages in materials and labor. The amount of steel being used is 10 times the weight of the Eiffel Tower.

“I’ve worked on many big things in my life, but I’ve never worked on anything this big,” an American project manager mused during a bus tour of the project, called Petro Rabigh, a joint venture of the state-run oil company Saudi Aramco and Sumitomo Chemical of Japan.

Size isn’t the only consideration. The project is Saudi Arabia’s boldest bet yet that this oil-rich kingdom can transform itself into an industrial powerhouse. The plant is part of a $500 billion investment program to build new cities, create millions of jobs and diversify the economy away from petroleum exports over the next two decades.

“The Saudi economy was in idle mode for 20 years,” said John Sfakianakis, the chief economist at SABB, formerly known as the Saudi British Bank, who is based in Riyadh, the Saudi capital. “Today, the feeling here is, ‘We’ve won the lottery; let’s not waste it.’ ”

The kingdom’s lofty economic goals would have been unthinkable without the surge in energy prices that has filled the coffers of oil producers. Oil prices have quadrupled since 2002 and reached $100 a barrel in New York this month.

Persian Gulf countries earned $1.5 trillion in oil revenue from 2002 to 2006, twice as much as in the previous five-year period, according to the Institute of International Finance, a global association of banks that is based in Washington. As the top exporter, Saudi Arabia has been the main beneficiary.

Despite all the recent headlines about Middle East investors bailing out troubled American banks like Citigroup, a growing share of today’s petrodollars are staying at home to finance megaprojects like Petro Rabigh, analysts say. That money is financing the biggest economic boom in a generation, helping to build not only the high-rises of Dubai, where the world’s tallest tower is going up, but also telecommunications networks, roads and universities throughout the Middle East.

Abu Dhabi is planning to spend close to $1 billion for a new museum with the help of the Louvre, in Paris. Dubai’s latest grandiose idea is to build a small-scale replica of the French city of Lyon, complete with residential housing, a museum, a culinary school and a soccer club.

In Saudi Arabia, Riyadh looks like a boom town: sprawling over 40 miles, it is teeming with shopping malls, electronics stores and luxury boutiques. But while times are good today, many Saudis realize that their country is locked in a race against time to create industries that produce more than just oil in order to keep a young and growing population employed. The kingdom, which has a population of 24.5 million, including nearly 7 million foreigners, has what one analyst called a “human time bomb.” About 40 percent of Saudis are under 15, and because the country has one of the world’s highest birth rates, the population is expected to reach nearly 40 million by 2025.

“It has been a social, and therefore a political, imperative of the Saudi government to develop the economy and to create employment opportunities,” said Timothy S. Gray, the chief executive of HSBC Saudi Arabia.

That could well mean that higher oil prices are here to stay. One paradox of modern-day Saudi Arabia is that while it seeks to reduce the importance of petroleum to its economy, it needs those exports more than ever.

TO be sure, the region’s economies are too small to absorb all the oil riches on their own. Too much money is chasing too few assets, analysts say, forcing oil producers to invest some of their revenue abroad and diversify their holdings, either through opaque state-owned investment funds or through direct private investments.

Last year, for example, a fund controlled by the government of Abu Dhabi bought a stake in Citigroup for $7.5 billion, while another run by Dubai’s ruler bought a large share in Sony, the Japanese consumer electronics giant. Sabic, a major Saudi petrochemical company, bought the plastics division of General Electric for $11.6 billion, and the Kuwait Petroleum Corporation bought half of Dow Chemical’s commodity-plastics unit for $9.5 billion.

In recent weeks, other big banks plagued by losses from the mortgage crisis, like Merrill Lynch and Morgan Stanley, have raised tens of billions of dollars from a variety of Middle Eastern and Asian funds, including ones from Kuwait or Saudi Arabia.

According to data compiled by Bloomberg News, overseas investments by Persian Gulf countries reached a record $75 billion in 2007. Arms deals, a time-worn way of recycling petrodollars, remain popular in the region; the United States is pushing for a $20 billion weapons sale to Saudi Arabia, for example. But while oil-rich states are still buying American Treasury bonds or military hardware from the West, analysts say the more significant trend is for a growing share of their investments to be pumped into local projects.

“The vision is to turn the kingdom into a major industrial power by 2020,” said Jean-François Seznec, a professor at Georgetown University who is a specialist in industrial policies in the Persian Gulf. “A billion dollars here and a billion there, and soon you’re talking about real money.”

Projects like Petro Rabigh, Mr. Seznec said, will allow Saudi Arabia to become one of the top three chemical producers in the world within a few years. Unlike Kuwait or Abu Dhabi, Saudi Arabia does not have a sovereign fund responsible for investing the country’s petroleum riches.

Ali Al-Naimi, the kingdom’s energy minister and one of the grand architects of Saudi industrial policy, summed up the country’s goals at the dedication ceremony for Petro Rabigh in 2006.

“I would like to highlight the fact that the Petro Rabigh project is part of a bigger picture,” Mr. Naimi said at the time. “This strategy includes expanding the base of the Saudi economy, diversifying national income sources, attracting international investments and reaping the direct and indirect benefits that these types of projects will accrue to the Saudi citizen.”

The trend to modernize and develop the economy is not entirely new, of course. Saudi Arabia has been trying to diversify itself for over two decades. It famously tried to make the desert bloom in the 1970s and ’80s by investing heavily in water desalinization plants and growing crops.

But a long period of low oil prices, from the mid-1980s through the 1990s, stalled much of its effort. The government still relies on petroleum exports for 90 percent of its revenue; oil sales account for half of the country’s gross domestic product.

The current level of oil prices has given the country’s industrialization strategy a new spring, allowing the government to improve its finances while investing in large infrastructure projects. The Saudi G.D.P. has doubled in the last five years. Not counting oil, economic growth has been 4 percent to 6 percent a year since 2002.

Oil has not been the only engine of growth. The country’s private sector has also thrived and now accounts for 45 percent of the economy, compared with just 20 percent about 20 years ago. Since the 1990s, the share of private Saudi money invested at home has doubled, and now represents about 20 percent of total holdings, according to SABB.

“There is a lot of money looking for investment opportunities,” said Mr. Gray at HSBC.

The financial turnaround has been spectacular. In 1999, the Saudi government’s debt amounted to 120 percent of G.D.P. That number has dropped to less than 20 percent as the government paid back its obligations and put its finances in order.

Last year, the government recorded a budget surplus of $48 billion, five times the surplus of 2003. This year, it has built its biggest budget to date around a conservative estimate of oil prices of $45 a barrel; that will almost certainly yield a substantial surplus at the end of the year.

All of that is a far cry from the 1990s, when oil averaged $20 a barrel, thanks mostly to Saudi concerns at the time to keep oil prices low.

One of the most noticeable illustrations of the industrialization push is a plan championed by King Abdullah, the 83-year-old Saudi monarch, to build six new cities throughout the country — including the King Abdullah Economic City on the western coast, near the city of Rabigh; the Knowledge Economic City, near Medina; and the Prince Abdulaziz bin Mousaed Economic City, in the north.

The intent is to create industrial centers that double as housing and commercial hubs for the country’s young and growing population. The Saudi Arabian General Investment Authority, a government agency, expects these cities to add $150 billion to the country’s G.D.P. by 2020, create one million new jobs and be home to as many as five million people.

Drawings of these new towns depict a cross of the futuristic “Blade Runner” and traditional Arabic design. But the new cities are also expected to become new industrial centers that focus on four main sectors: petrochemicals, aluminum, steel and fertilizers.

According to SABB, these cities together will have four times the geographical area of Hong Kong, three times the population of Dubai, and an economic output equal to Singapore’s. Other plans include building four refineries, two petrochemical plants and a modern graduate-level university with an endowment of $10 billion.

The frenzied growth of the economy has had some serious downsides. Inflation has been rampant in the last year; food prices and rents have risen sharply. Traffic jams in Riyadh and other Saudi cities have become a constant affliction, while real estate values have soared and the construction sector is strained by a lack of workers.

The stock market, meanwhile, has yet to recover from its collapse two years ago. From 2000 to early 2006, the local Tadawul stock index surged from 2,000 points to a peak of 19,870, a return of almost 900 percent. But the overvalued market went into a panicky free fall that caused it to lose two-thirds of its value in a matter of months.

After being flat for most of 2007, the market has recovered in the last quarter, gaining more than 40 percent. Still, its value is only about half that of its peak two years ago.

One reason for the partial rebound was anticipation of the sale of shares in Petro Rabigh earlier this month. For the first time, Saudi investors had a chance to buy a major asset linked to Aramco. The initial public offering, for 25 percent of Petro Rabigh, raised $1.23 billion and was the largest stock sale in Saudi history. The stock is expected to begin trading at the end of the month.

The project itself is still about a year away from completion. Once in operation, it will produce 2.4 million tons of plastics a year. This venture, along with dozens of other megaprojects, will firmly anchor Saudi Arabia as one of the world’s top suppliers of chemical products as well as oil.

“Saudi Aramco has a vision of itself as Exxon Mobil,” Mr. Seznec of Georgetown said, “except much bigger.”

Saudi Aramco Raises Crude Oil Prices to the U.S.

Saudi Aramco Raises Crude Oil Prices to the U.S. for February
By Nesa Subrahmaniyan
Jan. 7 (Bloomberg)

Saudi Aramco, the world's largest state oil company, increased its official selling prices for crude shipments to the U.S. for a second month in February.

The discount of Arab Light, the most common variety exported by Saudi Arabia, to Saudi Aramco's benchmark price narrowed to $4.15 a barrel from $6.85 a barrel in January, the Dhahran-based company said in a faxed statement on Jan. 5. Discounts for Extra Light, Arab Medium and Arab Heavy were also reduced. Aramco raised prices of Arabe Medium and Arab Heavy grades for Asian customers, while cutting them for Europe.

For U.S. customers, prices for all grades were raised by between $2.50 and $2.80 a barrel. Arab Extra Light's discount narrowed to minus $1.10 a barrel from minus $3.90 a barrel, Arab Medium to minus $7.45 from $10.05 and Arab Heavy grade to minus $10.75 from minus $13.25, Aramco said.

Prices to the U.S. are set as a discount to the West Texas Intermediate benchmark.

For Asian customers, Saudi Aramco cut its premiums for Arab Super Light, Extra Light and Arab Light by between 20 cents and $1 a barrel. Asian prices are quoted in relation to the average of Oman and Dubai grades, the two Arabian Gulf benchmarks used by Asian oil refiners and traders. Aramco started linking its prices to the average of Oman and Dubai crudes in 1986.

Aramco cut the premium for Arab Super Light by $1 to $6.05 a barrel, by 40 cents to $4.95 for Extra Light and by 20 cents to $1.55 for Arab Light. It narrowed discounts for Arab Medium by 10 cents to minus $1.75 a barrel and by 30 cents to minus $4.80 a barrel for its Arab Heavy grade.

Europe Shipments

Refiners in Europe and the Mediterranean would pay less for Saudi Arabian crude oil shipments in February.

For its Northwest European customers, Aramco widened Arab Light's discount to the benchmark by 25 cents to minus $3.15, Arab Medium was lowered to minus $5.70 and Arab Heavy reduced to minus $7.90, while Extra Light was cut to a premium of $1.20 from $1.55.

Oil refiners in the Mediterranean would pay between 50 cents and 70 cents less for their shipments from Saudi Arabia.

Mediterranean and European prices are expressed as a differential to Intercontinental Exchange's weighted average of North Sea Brent crude oil. All prices are free-on-board, where the buyer has to pay for shipping costs.

Saudi Aramco's most expensive oil variety is Arab Super Light and the cheapest is Arab Heavy.

Vela Orders 4 VLCCs for $600 million

Daewoo Shipbuilding Wins Order for Oil Tankers at Record Price
By Kyunghee Park
Nov. 14 (Bloomberg)

Daewoo Shipbuilding & Marine Engineering Co., the world's third-largest shipbuilder, received an order to build four crude tankers at an industry record price from Vela International Marine Ltd. of Saudi Arabia.

The 317,000-deadweight-ton tankers were priced at about $151 million each, Seoul-based Daewoo said in an e-mailed statement today. A 300,000-ton vessel cost $142 million at the end of September, according to Clarkson Plc, the world's biggest shipbroker. The order was announced yesterday.

Shipyards in South Korea, the world's biggest shipbuilding nation, have received record orders this year as global demand for iron ore, fuel, toys and computers increase the need vessels. Ship prices have more than doubled to a record since 2003, when they came off from a 10-year low.

``The order will help further improve Daewoo Shipbuilding's profitability,'' the shipbuilder said in the statement.

Including the latest order, Daewoo Shipbuilding now has a total of $18 billion in new contracts this year, surpassing its target of $17 billion. The company's backlog rose to about $39 billion, representing more than three years of work.

Daewoo Shipbuilding added 2.6 percent to 50,800 won as of 9:48 a.m. in Seoul, compared with a 2.4 percent advance in the benchmark Kospi index. The stock has climbed 74 percent this year, about double the Kospi's gain.

Saudi pipeline blast kills 28

Saudi pipeline blast kills 28
The Associated Press
Nov. 18, 2007

An explosion set a gas pipeline ablaze and killed 28 workers in eastern Saudi Arabia, the Saudi national oil company Aramco said Sunday.

"The fire broke out while contractor workers where linking a new pipe" to the pipeline during maintenance late Saturday, Aramco said in a statement.

It said 28 workers, including five Aramco employees, had died in the fire, which was put out early Sunday some 30 kilometers from its Hawiyah gas plant.

The company did not specify how many people had been injured in the blaze, or give the victims' nationalities.

"The company is taking all necessary measures to guarantee the continuation of the normal gas output," it said.

Saudi Arabia's national oil company, Saudi Aramco is the world's largest oil producer, located on the country's east coast.

The Hawiyah plant produces 310,000 barrels of ethane and NGL daily.

URL: http://www.msnbc.msn.com/id/21864094/

Saudi Arabia Pushes for Extra 500,000 bpd OPEC Hike

Saudi Arabia Pushes for Extra 500,000 bpd OPEC Hike
by Adam Smallman and Spencer Swartz
Nov 12th, 2007

Saudi Arabia is to push for an extra 500,000 barrels-a-day hike in output by OPEC, or 1.8%, as soon as this week if oil prices drive toward $100 a barrel, an official familiar with the situation said Monday.

Speaking the day after Saudi Arabia's Oil Minister Ali Naimi indicated that the 12-member Organization of Petroleum Exporting Countries may discuss a production increase, an official close to the group's policy discussions told Dow Jones Newswires: "The Saudis want another 500,000 barrels a day in the market. They don't like these prices for consumers."

Leaders from the world's top oil producers will meet this weekend in Saudi Arabia's capital, Riyadh to discuss the challenges a potential global recession and an anemic dollar present to their estimated $1.8 billion a day in revenue.

Presidents, sheikhs and a king from the OPEC cartel, which meets more than 40% of the world's needs, are to discuss a raft of challenges to their core business, including soaring costs to projects, heightened environmental concerns that spur a push toward alternative energies, and what, if anything, they can do to prevent record oil prices from destabilizing the global economy.

Senior officials within the Saudi Arabian delegation have made it plain they don't feel comfortable with current oil prices, which have almost doubled from a low of $49.90 a barrel in January to a record $98.62 a barrel for U.S., light, sweet crude last week, and that something must be done.

In Kuwait Sunday, Naimi, OPEC's de facto leader, told reporters: "It is premature" to speak of a production hike, but "when OPEC meets, we will discuss this issue," though it was unclear if he was referring to this week's summit or formal OPEC policy talks by oil ministers due Dec. 5 in Abu Dhabi.

One sticking point is the timing of any such a move. The official said the timing would hinge on talks with other OPEC oil ministers, who will meet Thursday or Friday in a closed session ahead of the summit of heads of state in Riyadh at the weekend.

"If the market progresses (and rises above) $100 a barrel, I think the Saudis will push for something then and not wait until the December meeting," the official said.

But a source familiar with OPEC thinking said Monday that insiders "really don't want this summit to turn into an OPEC policy meeting" and senior officials "are not getting any indication that they'll do anything" this week. It was, the source added, perfectly possible that oil ministers might agree to something late this week.

OPEC Revenue

OPEC's revenue may climb 9% this year to $658 billion, the Financial Times reported Monday, citing the U.S. Energy Information Administration, but, with rising economic concerns driven by a worsening global credit crunch, it is oil and the associated costs of heating fuel and gasoline that some economists now say could be the trigger for a full scale economic meltdown.

But the oil leaders may have little wiggle room when it comes to averting such an event, as many believe a wall of investment cash, not constrained oil flows, lie behind the record prices. Any move to add, say, a million barrels a day of additional oil, or around 3% more than they currently pump, would eat into Saudi Arabia's spare capacity ahead of the worst of winter, and at a time of heightened concern over OPEC member Iran's nuclear program and the future stability of U.S. ally Pakistan.

OPEC members at their last meeting on Sept. 11 agreed to raise output by 500,000 barrels a day from Nov. 1, shared among the 10 members with production quotas, amid growing concerns high oil prices may adversely affect global economies and that demand could outstrip oil supplies as the northern hemisphere's energy consuming nations head into winter season.

According to estimates by Dow Jones Newswires, the OPEC-10 in October were already pumping roughly in line with their new target of 27.25 million barrels a day, with Iraq and Angola, which don't have quotas, pumping a further 3.9 million barrels a day.

"However, OPEC's announcement has not yet dampened upward price pressure, and it is unlikely that these higher volumes will be enough to halt the downward trend in commercial inventories over the next several months," the U.S. Energy Information Administration said.

Indeed, recent output hikes by OPEC have tended to be followed by record high oil prices as investors assume spare capacity is shrinking and demand will outstrip supply.

With no OPEC hike agreed this week, leaders, many of whom hold competing political views, may be forced into issuing a bland communiqué that insiders say seeks to reassure customers they are reliable suppliers of oil and are increasingly responsible toward the environment.

© 2007 Dow Jones Newswires.

Saudi Arabia issues rules for succession

Saudi Arabia issues rules for succession council
By Andrew Hammond
Oct 8, 2007
(Reuters)

Saudi Arabia's King Abdullah issued rules on Monday guiding the conduct of a body set up last year to regulate political succession in the world's biggest oil exporter.

The Saudi throne has passed from one brother to the next since the death of Abdul-Aziz bin Saud, the founder of the state. With many of his 44 sons now dead or aging, power could soon move onto the next generation; his grandsons.

Western diplomats have welcomed efforts to regulate succession in the Islamic kingdom, which they say is an attempt to avoid leadership disputes, which have erupted in the past.

Unlike many Western monarchies, the throne in Saudi Arabia does not pass automatically from a father to his eldest son. Neither is it decided by seniority, but by a small group of the most powerful Saudi royals.

Saudi Arabia last year announced plans to set up a so-called "allegiance" council which would regulate succession but would not take effect until Crown Prince Sultan, heir to King Abdullah, accedes to the thrown.

Last year's statement said that if the new council rejects a nominated crown prince, it may vote for one of three other princes the king nominates for the title.

Monday's statute did not mention this but appears to ensure that power lies with the living sons of the kingdom's founder since there can be only one grandson on the council for each dead or incapacitated son of Abdul-Aziz bin Saud.

The statute, carried on the state-run SPA news agency, also allows two-thirds of the council to force out any prince who is deemed to be "in transgression" of the statutes, which say members should be at least 22 years old and have demonstrated "probity and competence".

The statute also talks of a "medical committee" but gives few details.

Within 10 days of becoming king, a new monarch must inform the committee of his choice for crown prince or ask the council to make its own nomination.

The Saud family set up Saudi Arabia in 1932 and dominates political life. The country has no elected parliament, rules by strict Islamic law that gives clerics wide powers, and bans political parties and street demonstrations.

The last succession from the late King Fahd to King Abdullah in 2005 was smooth, but there have been crises in the past.

Saudi Arabia's second king, Saud, was deposed in 1964 by his own family when he was deemed incompetent after a power struggle with his half-brother Faisal. Faisal, his successor, was shot dead by a nephew who was then declared officially as insane.

The new council will be "reappointed" every four years and the statutes can only be amended "by royal decree after the consent of the allegiance institution", SPA said.

The statute also says council decisions should be approved by the king but it is not clear what happens if the king opposes committee votes.

King Abdullah, an octogenarian, oversees a country with a growing population of 24 million, including 7 million foreigners, struggling to steer a course between tradition and modernity.

Saudi Production from IEA

From IEA's September Oil Market Report (OMR), pages 21-22

The supply estimate for Saudi Arabia in July is also revised up by 50 kb/d to 8.67 mb/d and further to 8.7 mb/d for August. Stronger exports account for the July change. This report uses crude supply (comprising exports and domestic refinery throughput) as a proxy for production for Saudi Arabia and some other OPEC producers. Hence data on the JODI system showing 8.9 mb/d output for Saudi Arabia in July include substantial deliveries into storage. This report would normally account for that extra oil in subsequent months when it is exported. Nonetheless, Saudi supply does appear to be edging higher, despite buyers generally suggesting flat-term volumes for the period through October.

New OPEC Quotas

OPEC says Saudis to assume almost two-thirds of output hike
Platts
Sept. 14, 2007

OPEC kingpin Saudi Arabia will boost its production by 327,000 b/d under
the cartel's output increase announced earlier this week, assuming 63% of the
522,000 b/d OPEC plans to put on the market from November 1, according to
figures released by the group Friday.

The Saudis' new production allocation will be 8.943 million b/d. That is
up from August output of 8.616 million b/d, according to figures from
secondary sources used by the cartel.

OPEC, at its meeting Tuesday in Vienna, said it would raise its actual
production by 500,000 b/d from November, while setting a new output target of
27.253 million b/d.

Cartel officials said the new allocation figures would be altered from
August output numbers from secondary sources, which actually results in a
slightly higher planned output increase of 522,000 b/d.

In raising its production target to 27.253 million b/d from 25.8 million
b/d, OPEC essentially formalized 930,000 b/d of overproduction, on top of
adding the 522,000 b/d in new output.

Not all members will see an increase under the new allocations; figures
for Iran and the United Arab Emirates have decreased. Iraq and Angola are not
part of OPEC's output agreements and are not assigned allocations, though
Angola will join the allocation system next year.

Here are the new allocations for OPEC's 10 members bound by output
agreements, from November 1:

              August     New allocation  Change
              output     from Nov 1
Algeria        1,354       1,357           3
Indonesia        839         865          26
Iran           3,869       3,817         -52
Kuwait         2,446       2,531          85
Libya          1,710       1,712           2
Nigeria        2,145       2,163          18
Qatar            821         828           7
Saudi Arabia   8,616       8,943         327
UAE            2,573       2,567          -6
Venezuela      2,358       2,470         112

Total         26,730      27,253         522
(All figures in '000 barrels/day)

Read more about OPEC in Platts OPEC Guide at
http://www.platts.com/Oil/Resources/News%20Features/opec/index.xml

Jim Jubak on OPEC

The oil-producing nations' fast-growing, subsidized economies and soaring consumption of petroleum are big reasons the rest of world is paying more for its crude.

By Jim Jubak
This time, OPEC really is to blame for higher oil prices. [original article]
Jubak's Journal 9/18/2007

In recent days, oil traders and speculators have forced the price of oil above $80 a barrel despite the Organization of Petroleum Exporting Countries' decision to raise production.

I fully expect oil prices to keep rising for the rest of 2007 and into 2008. The only thing likely to stop oil from climbing to $85 a barrel is profit-taking by speculators themselves.

Not every OPEC country is happy about this rise in oil prices. The Saudis, for example, have argued for increased production to hold down prices and keep demand from falling. But oil prices are headed up no matter what OPEC says or does.

And OPEC really doesn't have anyone else to blame for its inability to set prices. Runaway demand in the oil-producing countries themselves is the newest factor pushing up global oil prices.

Why prices are still rising

You can see where oil prices are headed in the reaction Sept. 12 to OPEC's announcement that it would increase production. Despite the news, prices went up that day. The price of a barrel of benchmark West Texas Intermediate crude climbed $1.68 to $79.91.

The next day, crude tacked on an additional 13 cents a barrel to close at $80.04. Speculators were ecstatic: Hedge funds and other traders have staked out big positions in the options market at $80 a barrel that are worth billions as oil climbs above that level.

So why were traders able to move oil prices up in the face of an OPEC production increase?

A 500,000-barrel-a-day increase in production is little more than symbolic. If the Saudis, the driving force behind this increase, were serious about holding prices at this level or driving them down, they would have pushed through an increase of 1 million barrels or more. All an increase of this size does is ratify current levels of production, which are as much as 2 million barrels a day above the official quota.

There's a huge debate inside the oil industry and in the commodity pits about the status of Saudi oil reserves. The Saudis, who produce 9.5 million barrels a day now, have announced they will boost production to 12.5 million barrels, a 32% increase, by the end of this decade and to 15 million barrels by the end of the next decade. However, some oil traders and industry analysts don't think Saudi Arabia can deliver and contend that the Saudis' big oil reserves are in far worse condition than they are letting on. The impact of any shortfall would be huge because the Saudis are the only likely global source of a major increase in oil production in the next five years, according to the International Energy Agency. Without that production increase, the world is headed for a very painful short-term oil squeeze, the agency has concluded. So you can think of energy traders' bets on oil climbing above $80 as a huge vote that the Saudis won't or can't deliver as promised.

Traders and analysts also aren't convinced that OPEC as a whole wants to increase production. The Saudis carry great clout inside that organization, but they have faced fierce opposition this year from an OPEC faction headed by Venezuela and Iran that is adamant about keeping prices as high as possible. Both countries desperately need high oil prices: Oil revenue is the only thing that stands between the regimes that rule in Caracas and Tehran and huge, possibly uncontainable protests. Anything that cuts into revenue, endangering subsidies that keep gasoline prices in Iran near 40 cents a gallon and that fund cheap food and health care in Venezuela, would be a political disaster.

In the past, Venezuela and Iran probably wouldn't have carried the day. OPEC regularly raised production to modulate price spikes, so that peak oil prices wouldn't cut into global economic growth, leading to lower demand for oil and a plunge in oil prices.

In other words, OPEC felt it was in its own interest to avoid pushing the global economy into a slowdown with unsustainably high oil prices. Sometimes OPEC got it wrong and set prices too high or moved too slowly to lower them, but heading off an economic slowdown has been a fundamental part of OPEC policy.

Why higher prices haven't cut demand

But recently, higher global oil prices haven't reduced global demand for oil or pushed economies into recession. In its Sept. 12 projections, the International Energy Agency cut its estimate of global oil demand for the end of 2007 to 85.9 million barrels a day, but that is still 1.7% higher than demand in 2006. For 2008, the agency is projecting a 2.4% increase in demand.

We're less energy intensive

You already know part of the reason for that. The developed economies of the world have become a lot less energy intensive over the past three decades. For example, in the United States, energy use per unit of economic production (gross domestic product) fell by 28% from the OPEC oil embargo of 1973 through 1995.

Higher oil prices were responsible for much of that decrease in energy use. From 1995 through 2004, energy use per unit of the economy fell an additional 26%. This time the decline had less to do with energy prices, which plunged at the beginning of that period, than with the steady shift of the U.S. economy from manufacturing to service industries. The same trend shows up in Europe and Japan.

Because these economies use so much less energy per unit of GDP than they did 30 years ago, they're a lot less sensitive to increases in energy prices. Energy is simply a smaller part of the cost of doing business in these economies for most companies.

Rising economies relatively immune

The other part of the story that you probably know involves the developing economies of China, India and the rest of the rapidly industrializing world. Between 2000 and 2006, when global oil demand grew by 8 million barrels a day, growth from China alone accounted for about 32% of the total increase, according to the International Energy Agency. (The United States accounted for 12.5% of growth.)

Energy use in these developing economies has also been relatively insensitive to rising oil prices. Some developing economies -- China is the most important example -- are mixes of command-style and free-market economies where the government sets prices and determines profit goals.

Also, these economies are showing their own improvements in energy efficiency, and, most important, when an economy is growing at 11% a year, breakneck revenue growth overwhelms concerns that higher energy costs might cut into profit margins. Total profit is growing so fast that nobody worries much if margins are falling.

Subsidies encourage higher consumption

But there's a third part of the global energy demand story that hasn't received much attention until lately -- and it explains why higher oil prices haven't slowed global economic growth more rapidly and why OPEC is getting badly beaten by the energy traders these days.

Remember that I said that China had accounted for 32% of global growth in oil demand from 2000 to 2006 and that the U.S. had accounted for 12.5%? Well, there's another group of countries that, when it comes to global growth in oil demand, has been more important than the U.S. and only slightly less important than China. From 2000 through 2006, OPEC countries themselves accounted for 22% of global growth in oil demand.

In these OPEC countries, because oil consumption is so heavily subsidized, either directly in the consumer market or through government subsidies to energy-intensive industries, the rising market price of oil isn't felt much at all. Though higher market prices for oil are putting pressure on government budgets in these countries -- those subsidies cost money -- they have almost no effect on energy consumption.

From 2000 through 2006, oil consumption by OPEC countries climbed by 1.8 million barrels a day, or 29%. Consumption is projected to climb 400,000 more barrels a day this year. OPEC consumption has been growing at 2.5 times the rate of global consumption.

By the end of this year, consumption growth in OPEC countries will just about wipe out all the 2.2 billion barrels a day in increased production that OPEC has added since 2000.

Little reason for trend to change

Traders are right to assume that this trend isn't about to reverse anytime soon. Saudi Arabia and Iran are determined to use their oil riches to build energy-intensive economies. Venezuela, Mexico and Iran use higher oil revenue to fund their governments and to subsidize prices for everything from gasoline to pharmaceuticals to food. Young and increasingly well-off populations in these countries want the energy-consuming trappings of wealth that are already enjoyed in the developed countries.

And because subsidized domestic market prices for oil and gasoline are so low in OPEC countries, there's little incentive for improving energy efficiency or switching to other fuels.

As oil prices go up, the economies of the OPEC countries boom. That increases consumption in OPEC countries, which drives up oil prices and stretches out the economic boom. Which drives up consumption. Which sends oil prices up again.

I don't know whether you want to call this a vicious or a virtuous cycle, but a cycle it is, and it is clearly pointing to higher oil prices unless the Saudis can pull a couple of million barrels of production a day out of their hats.

The oil speculators have made a pretty good bet.

Oil Rises to 6-Week High

Oil Rises to 6-Week High on Signs OPEC Will Keep Output Quotas
By Mark Shenk
Sept. 10 (Bloomberg)

Crude oil rose to a six-week high on speculation that OPEC ministers will maintain production targets when they meet tomorrow in Vienna.

Representatives from members including Iran, Kuwait and Qatar said in the past week there's no need to increase quotas that were set last year. Some Persian Gulf producers are discussing an increase, two delegates said today.

``The consensus remains that OPEC will do nothing tomorrow,'' said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut, energy consultant. ``There was fresh discussion about a production increase today, but opposition from Iran and Venezuela is too strong for this to occur.''

Crude oil for October delivery rose 79 cents, or 1 percent, to settle at $77.49 a barrel at 2:49 p.m. on the New York Mercantile Exchange. It was the highest close since July 31. Prices are up 17 percent from a year ago. Futures touched $78.47 at 3:54 p.m. in New York, the highest intraday price since reaching a record $78.77 a barrel on Aug. 1.

`Bullish Mode'

``Technically the market is still in bullish mode,'' said Ric Navy, a broker at BNP Paribas SA in New York. ``We're unable to maintain downward momentum. There were many opportunities for the bears to take prices lower but they failed.''

A 500,000 barrel a day quota increase will be discussed during the meeting and the timing of any increase remains undecided, one of the delegates said. The second delegate said he doubted other OPEC members would agree to such an increase. Both officials declined to be identified before the start of official talks at the group's Vienna headquarters.

``There was speculation that Kuwait, Saudi Arabia and/or the Emirates would ride to the rescue of the Fed and propose that quotas be increased,'' Beutel said. ``If they raise production the Fed can forget about inflation and concentrate on fighting what may turn into a recession.''

Two Federal Reserve bank presidents suggested that the U.S. economy is weakening after the labor market shrank in August, and that the housing market shows no sign of recovery.

`We Can Wait'

``There is no reason to increase output; the market is well supplied,'' Venezuelan Oil Minister Rafael Ramirez said today in an interview. ``We can wait until December.''

Any quota change would be viewed as a surprise. All 23 oil traders and analysts in a Bloomberg survey last week said they expect OPEC to leave its collective target unchanged.

``It's odd that the Saudis are completely silent ahead of this meeting,'' said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. ``I think it is likely they will float a proposal to increase quotas, probably 500,000 to 1 million barrels a day. While I don't think it goes anywhere, it will focus the discussion on the possibility for quota increases later in the year.''

Saudi Arabian Oil Minister Ali al-Naimi declined to comment to reporters in Vienna this morning. Saudi Arabia is the world's biggest oil exporter and the most influential member of OPEC.

OPEC wants respectability

The Energy Report
Phil Flynn
September 10, 2007

OPEC wants respectability. All right Ali, here's your chance. In the past I have compared Ali al-Naimi, the de Facto leader of the OPEC cartel, to Alan Greenspan when he was Federal Reserve Chairman. Let’s face it, Mr. Naimi has relished his role as sort of the central banker of oil. Mr. Naimi is the Saudi Oil Minister and in truth is the most influential man in the OPEC cartel. He has tried to bring a certain degree of respectability to the business of price-fixing and collusion.

Of course if you want to be compared to Alan Greenspan you have to learn to make the tough decisions and inspire others to go along with you. There are reports that Mr. Al-Naimi actually favors an increase in oil production at tomorrow's OPEC meeting but does he have the will and power to make his case to the other members who fear an output increase? There is little doubt that Ali Al-Naimi is an impressive character but does he have what it takes to lead at this important moment in OPEC history?

OPEC members we have heard overnight such as Kuwait, Iran, and Libya oppose an oil output increase. Can he make the tough call and get the rest of the cartel to realize that this might be the most important decision the cartel may make?

If you want to act as a central banker of oil what you should do is add more oil to the market in signs of economic stress. If there is more oil on the market oil prices should go lower and it should make it easier for the economy to avoid a recession. And with the US economy in scary shape after the much worse than expected jobs report last Friday and the chances of a recession rising does Mr. Naimi have the ability to react to an obviously dangerous economic situation?

Yet the cartel has other ideas. OPEC President Mohammad al-Hamli says that despite the tightening of credit in the US the world economy was growing strongly and should continue into next year. But is he as good a judge about the heath of the economy as al-Naimi? Hasn’t much of the growth around the world been fed in part by the US consumer? And wouldn’t the US consumer be better off if the price of oil was trading lower than the $76.00 per barrel area? Why does OPEC not see that a US recession would be a devastating blow to the prospect for oil demand. Is it just greed or is it fear?

Well it’s probably both but the fear was best expressed by Qatari Oil Minister Abdullah bin Hamad al-Attiyah who asked, “What is an increase in oil production, and nobody will buy it?".

In other words, they fear a price collapse if they raise production and demand still falls. They still have nightmares of when they raised production ahead of the Asian financial crisis that nearly bankrupted many in the cartel. In the long run that price drop helped create an environment that lead to one of the largest price run ups in the history of the world oil markets.