Sweet & Sour: A problem shared is a problem halved

The shooting of five Western engineers by gunmen in Saudi Arabia's Red Sea port of Yanbu last weekend and the suicide boat attacks against Iraq's oil terminals last month has again highlighted the vulnerability of the region's oil installations.

Both attacks, though different in the methods used, were unprecedented and have raised the stakes as well as the so-called "risk premium" that has contributed to the rise in oil prices to their highest level in more than four years.

The boat attacks against Basra and Khor Al Amaya, post-war Iraq's main economic lifelines, occurred under the noses of the US-led occupation force and navy while the Yanbu shooting appeared to have been an inside job by Saudis working on a petrochemical project in the Red Sea port city.

Add to this the continued turmoil in Iraq, the Palestinian territories, the threat of a production cut by Opec, the erosion of spare capacity among the majority of oil producing countries, and the gasoline crisis in the United States, exacerbated by the lack of new refining capacity in the huge US market and you see why there is little chance of oil prices coming down any time soon.

The Saudi Arabian Oil Minister, Ali Al Naimi, during a visit to the United States last week proposed building new refineries in the US.

Economic recovery

He told his American audience that even if Opec released more crude oil, it would not necessarily mean more and cheaper gasoline at the service station.

The International Energy Agency (IEA), the West's energy watchdog, disagrees. It has just published a special report studying the impact of high oil prices on the world's economies in which it puts much of the blame on the Opec producers.

The IEA report said fears of Opec supply cuts, political tensions in Venezuela and tight oil stocks had driven up world crude and product prices to an extent that the global economic recovery was being threatened. World GDP would have been half a percentage higher had oil prices remained at mid 2001-levels, it said.

Current market conditions were "unstable", in part because of geopolitical uncertainties and because tight product markets-notably for gasoline in the United States-are reinforcing upward pressure on crude prices.

The danger for Opec was that achieving high prices comes at a cost of losing market share and making it harder for producers to invest in new production capacity to meet rising world oil demand.

So far so logical. But the point is that Opec has not made any production cuts, not from real levels anyway. It has talked and agreed output reductions but none have been implemented in full. Opec is only part of the problem.

The US-led invasion of Iraq was meant to alleviate part of that pressure and make available to the world an uninterrupted flow of crude oil supply from the country that holds the world's second biggest oil reserves in controlling Iraq, the United States was supposed to make sure that other oil powers in this vital region played along.

But all this assumed that things would go according to plan. That security would come first, democracy would follow and oil would flow freely in all directions. What makes the attacks against Yanbu and the Iraqi ports so much more serious is that oil markets are too tight to sustain any interruption and there is little spare capacity outside of Saudi Arabia and the UAE.

All other Opec members are producing at full or below capacity. North Sea production, which saw the world through the oil shock of the 1970s, is now in decline while Chinese demand is sucking up surplus crude oil at any price.

Stable market

So what is the solution? A reasonable suggestion has come from Ali Obaid Al Yabhouni, head of marketing, research and analysis at the Abu Dhabi National Oil Co.

Al Yabhouni, writing in the latest edition of Adnoc News, made a point that only through cooperation between oil producers and consumers could a stable oil market be achieved.

Consuming governments could contribute to such stability by cutting their taxes and showing flexibility in the way they use their strategic reserves. Consumers could draw down stocks in times of shortage to meet demand and not as a stick to force prices down.

Oil exporting nations would supply more oil to replenish these stocks. This could be done by establishment of a "reserve bank" of spare capacity to be used in times of need.

Will it work? Who knows, but at least it is a constructive suggestion that does not seek to lay blame on one side or the other. The upcoming producer-consumer dialogue in Amsterdam later this month would be the ideal opportunity to start a debate along those lines.

It may not achieve much, but it is a start, for there is truth in the saying that a problem shared is a problem halved.

The author is Middle East editor of Platts, energy information divison of the McGraw-Hill Group. The opinions expressed in this column reflect those of the Author and not those of Platt