What Oil Crisis? – OpEd

Those talking up the market in the hope of making a killing will burn their fingers

When a supposedly reputable organization such as Nomura Securities suggests that the price of oil could hit $200 a barrel because of current unrest in the Middle East, questions have to be asked about its intentions.

The Nomura projection is based on both Libyan and Algerian oil production being stopped. Yet there is no indication that Algerian production is about to cease — certainly not at the same time as Libya’s. Moreover, Nomura’s figures do not take into account increasing production elsewhere, such as in Brazil and Russia. In any event, Saudi Arabia has sufficient spare capacity to meet not only a 1.7-million barrel-a-day Libyan shortfall but a 1.4 million b/d Algerian one as well. It has made it abundantly clear in the past few days that it can — and will — pump the extra oil if required. That is a guarantee.

So is the Nomura suggestion a case of straightforward ignorance by researchers out of sync with reality? Or is Nomura deliberating talking up the price?

They are not the only financial institution to wade in with comments that destabilize the market. Goldman Sachs have spoken of a “significant upside risk” to prices, warning that further disruptions could create severe shortages in global oil markets.

This grossly irresponsible speculation becomes even more absurd in suggestions that unrest could “spread” to the Kingdom and affect Saudi production. Bloomberg, for example, did just that a couple of days ago, on the basis that “unrest in Bahrain, which is linked to Saudi Arabia by a 26- kilometer causeway, has in the past spread across the border.”

Bloomberg evidently knows nothing about what makes the Kingdom tick. The situation is very different to that in North Africa or Bahrain. Saudi Arabia is no more likely the next location of protests than Switzerland or Singapore. The idea would be laughable was it not for the fact that such ill-informed speculation is doing great damage. It is the real cause for the oil price going up.

If financial institutions, hedge funds and speculators are deliberately talking up the market in the hope of making a killing, they had better think again. Otherwise they are going to get their fingers burned. Saudi Arabia’s promise to step in at a moment’s notice, if need be, and ensure demand is met is for real. It will make extra oil available.

“If need be.” Those are the key words. In fact, it is already happening in response to Libyan shortfalls. Production will be further increased where needed. Indeed, Saudi Arabia has been talking to the Europeans about possible shortfalls and what is required.

There are two good reasons why it is taking this action. One is that the Kingdom sees the speculators as a blight that needs to be stamped on. The other is that it has made it clear that $100-a-barrel is too high a price. This is not philanthropy. If the price is too high, it not only damages consumer economies, it damages Saudi Arabia in the process. Inflation and economic instability elsewhere causes inflation and economic instability at home.

For that reason Saudi Arabia will take action to meet demand. And if it causes speculators maximum financial pain in the process, that is a bonus.