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Saudi Arabia oil summit should look beyond the short term

Saudi Arabia oil summit should look beyond the short term 

By Richard Fletcher

Last Updated: 11:49pm BST 20/06/2008

When Saudi Arabia announced its plans for a landmark oil summit a few weeks ago, the news was treated with a heavy dose of scepticism. It seemed that the world was paralysed to do anything about the spiralling price of oil and the consequent impact on economic growth. But, as world leaders and energy experts descend on Jeddah for tomorrow’s meeting, the doubts are being replaced by optimism. 

Saudi Arabia, the world’s biggest crude producer, has already begun raising output and the mood music coming from the kingdom points to further rises. 

Of all the Opec members, Saudi Arabia has been the most fearful that record oil prices could destroy demand as crude-consuming economies contract. Killing the proverbial goose might not matter so much in Iran or Venezuela, which want to use Opec’s power as a weapon against the United States. But it is not just the US and Western economies that are suffering. This week’s riots over petrol prices in the rapidly-expanding China underlines the need for Beijing to join Washington and London in pushing Opec to raise output.

But the meeting is not just about Saudi Arabia answering the pleas of struggling economies. Some substantive proposals are being put forward that may have long-lasting affects on both sides. Prime Minister Gordon Brown is expected to suggest making it easier for Opec members’ sovereign wealth funds to invest in Western companies. In return, oil majors like BP or Shell would get greater opportunities to invest in Opec’s oilfields. Opec countries will also want their Asian counterparts to make it easier for Middle East producers to build refineries closer to their markets, especially China.

In siding with consuming nations, the Saudi government has gone out on a limb. Yesterday, Opec’s president, Algeria’s Chakib Khelil, called it “illogical and irrational” to raise output. Some Opec members are refusing to attend the summit in disgust at what they feel is Saudi Arabia’s unilateralism. Maybe it doesn’t matter. In Opec, Saudi Arabia calls the shots. If it raises output, the others will follow.

The cartel has always maintained that the oil price is driven by speculators and geo-political factors, not shortages. To a large extent that’s true but it does ignore the law of supply and demand. A problem is, though, that many Opec members are already operating at full capacity. What spare capacity exists is for heavy crude – not the sort of thing easily refined into petrol – and which already trades at a discount to “sweeter” oil. Consuming nations will want guarantees that Opec can deliver the sort of oil it wants before trading away any bargaining position on sovereign wealth investment.

Saudi Arabia will not want its meeting to fail. Indeed, it’s unlikely the kingdom would ever have agreed to stage the event if it felt the summit would do so. Its immediate success will be judged on what happens to the oil price in the coming days. But there are big hopes that this summit can look beyond days, towards years.

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