Can Saudi Arabia Bring Down Gas Prices?
Some Say the Kingdom Could Help Lower Oil Prices With a Large-Scale Production Increase
By ALICE GOMSTYN
ABC NEWS Business Unit
June 11, 2008—
What would it take to bring oil and gas prices down from the record highs that have frustrated consumers for months? Well, let's start with about another one million barrels of oil a day from Saudi Arabia.
The Middle Eastern kingdom — which, according to the International Energy Agency, has the world's largest proven oil reserves — hasn't announced such a large-scale production increase, but it could happen, some say.
"I think they know it's in their best interest to do whatever they can, psychologically, to bring the prices down," said Dan Flynn, an energy trader with Alaron Trading Corp. in Chicago.
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Iyad Madani, Saudi Arabia's information and culture minister, said Monday that the country called for a meeting between oil-producing and oil-consuming countries to discuss how to tackle surging oil prices. Madani also said the kingdom was ready to provide oil companies and countries "with any additional oil they need."
The Saudis announced a 300,000 barrel-a-day increase in oil production last month, or 3.3 percent, but the news had little impact on oil markets.
Still, according to Flynn, if the Saudis increased production by about one million barrels a day (or more than 10 percent) — the kingdom now produces 9.4 million barrels a day — the supply increase could trigger a massive sell-off in oil contracts and a dramatic drop in oil prices.
Prices hit a new record above $139 a barrel last week and teetered today around $132, with average U.S. gas prices now exceeding $4 a gallon. Flynn said that a Saudi production boost could bring prices down to about $85.
"If a market does have its sell off, it'll happen fast and furious," Flynn said. "I think we're getting to a boiling point one way or the other."
But Flynn was careful to note that such a Saudi-spurred drop could only happen in the absence of major setbacks in other oil-producing fronts.
"The Saudis are just part of the overall pricing equation and they could only do so much," said Jim Ritterbusch, president of the oil trading advisory firm Ritterbusch and Associates.
Several industry experts said that the weakness in the U.S. dollar — oil contracts are traded in dollars — and geopolitical developments ranging from Russia's nationalization of its oil resources to attacks on pipelines in Nigeria play a large role in keeping oil prices high.
Meanwhile, increases in oil production after the start of the war, experts said, have helped keep oil prices from shooting even higher. But the production jumps haven't been great enough to counter other forces driving the market.
Lucian Pugliaresi, president of the Energy Policy Research Foundation in Washington D.C., gave a more conservative estimate of how a Saudi production spike would affect the oil markets.
He said that prices could drop anywhere between $2 and $20, depending on how much more the kingdom produces. The drop would be greater, he said, if Saudi Arabia indicated that it would also pursue more production increases in the future.
"Every amount helps," he said.
There are questions about whether Saudi Arabia can actually live up to reports that it is physically able to increase production by as much as two million barrels a day.
Pugliaresi said the kingdom could "easily" increase production by at least a million barrels.
"They have the equipment installed and ready to go," Pugliaresi said.
While some agree with Pugliaresi, Witold Henisz is more skeptical. Henisz, an associate professor of management at the Wharton School, the business school at the University of Pennsylvania, said that Saudi Arabia has been secretive about its infrastructure, its reserves and its investment in oil production.
"One of the interpretations is they don't have surplus capacity to bring on the market and that scares people," Henisz said.
If the Saudis increase supply by between 300,000 and 400,000 barrels, about 3.1. percent, they could at least stabilize oil prices, according to Ritterbusch. The increase, he said, would meet growing demand in China and India.
The Associated Press contributed to this report.