Slowly but surely it is beginning to dawn on a world mesmerized by the Democratic primary contest that an oil cartel has been picking our pocket with impunity by willfully failing to adjust its output to the additional needs of China and India. More specifically, Americans are beginning to wonder at the logic of continuing to keep Saudis safe. Hence, the US-Saudi oil axis faces a day of truth when president Bush will deliver diplomatically to his Saudi hosts the message NY senator Chuck Schumer delivered most undiplomatically:
We are saying to the Saudis that, if you don't help us, why should we be helping you?
And the Saudis are only NOT helping, they are hurting.
The Saudis have let their output fall from 9.5m to 8.5m bpd over the last two years, camouflaging the move behind the accession of Ecuador and Angola to the group (which boosted nominal supply). OPEC failed to compensate for a 330,000 bpd drop in Nigerian production in April, allowing the market to tighten further.
Saudi behavior baffles none other than Dr Fadhil Chalabi, a former OPEC secretary-general and now director of the Centre for Global Energy Studies:
"They have about half a million barrels a day of good crude that they could put on the market. The puzzle is why they are not doing it. The soaring price is obviously telling us that the world needs more oil,"he said. "I can't understand why the Saudis would risk their strategic relationship with the US over this.
"They need the US more than ever given the growing influence of Iran in the region," he said.
Prior to President Bush's visit, the Saudis put out the word out that they would promise Bush to produce more though they would not help lower the price of oil regardless of Congressional threats to proceed with legislation penalizing the OPEC producers' cartel for "anti-competitiveness practices". But when Bush arrived they rebuffed him completely arguing that they had already increased production by 300,000 barrels per day earlier this month. Consequently, the Saudi oil minister insisted, all is well:
"Supply and demand are in balance today... The fundamentals are sound."
Ouch! but why?
The short answer is: OPEC, including the Saudis, want to prevent oil from becoming obsolete. Alternatively, they want to make as much money as possible as long as possible and to be able to use their sovereign wealth funds to maintain the economic leverage they currently enjoy.
And what will it take to change their mind? For what are they bargaining?
First, they want to see energy demands curtailed rather than supplies increased so that oil will continue to be able to meet that need.
Second, they want oil consumers to continue to promote investment in oil and to promise NOT to invest in or subsidize seriously the development of alternatives to oil.
Third, if alternative energy is to be developed, it should not substitute for oil, merely supplement it.
Fourth, they want "to smooth the recycling of billions of dollars in oil revenues from producers back into consuming countries." In other words, end the growing scrutiny of sovereign wealth funds.
Such demands make perfect sense from the oil producers' point of view as it will enable them to maintain their noose not only around the West's neck but also around Asia's neck. Indeed, I cannot imagine anything more dangerous than meeting these demands because it is bound to exacerbate the current world wide competition over energy supplies and even lead to another world war. Asians are particularly and justifiably annoyed with Western calls to limit their development.
Nor should the dangers posed by sovereign wealth funds be downplayed, fashionable as it may be to do so. It is particularly useful to recollect the warnings issued by the editors of the FT as late as July 2007. Everything written then has only become more pressing now:
The sheer volume of money placed at their disposal – ING estimates that they manage $2,200bn, which could grow to $7,000bn to $9,000bn by 2015 – adds a new dimension to the perennial sensitivities of cross-border buy-outs. German Chancellor Angela Merkel, in calling for a European system to vet acquisitions by these funds, responds to genuine concerns over their opaque nature and potential to act through political motives. . . .
Yet the rapid growth of sovereign wealth funds poses risks beyond that of national security. There are worries over competence within some funds; concerns that their scale and ability to affect asset prices could lead to market volatility; and suspicion that they could help countries preserve a favourable currency regime. If decisions are swayed by political considerations, they could also undermine market discipline that matches rewards to sound corporate governance.
Hence, the FT's editors call for an oil summit at which the oil producers' demands would be met is most disconcerting, as is their columnist Martin Wolf's idealistic recommendation that scarce oil be shared and shared alike:
. . . do try to reach global agreement on a pact on trade in oil based on the fundamental principle that producers will be allowed to sell their oil to the highest bidder. In other words, the global oil market needs to remain integrated. Nobody should use military muscle to secure a privileged position within it.
Yes, and my grandmother has wheels. What is called for is a realistic recognition that the time has come to reduce, not enhance OPEC's economic power and that we will all pay dearly if we squander the opportunity to develop alternative energy sources (though not food based biofuel which leads to higher food costs), presented by the current high price of oil. For ultimately, nothing less is at stake than the peace and prosperity of our global community.