Saudis increase oil production

Saudi Arabia granted President Bush’s request for an increase in oil production yesterday, while the Bush administration heeded calls from Congress to temporarily stop filling the Strategic Petroleum Reserve.

Both moves are aimed at easing tight world oil supplies, but the relatively small steps failed to prevent oil’s ascent to another record high over $127 a barrel in New York trading before settling at $126.29 yesterday. Analysts expect pressure on oil prices to remain high as China increases its consumption of diesel to fuel rescue efforts and rebuilding after a devastating earthquake.

With regular gas prices nearing $3.80 a gallon nationwide, high fuel prices have become the No. 1 economic worry and voter complaint in the United States, forcing politicians to try to find solutions. Consumer sentiment sank to the lowest level in 28 years as gas prices rose relentlessly to new highs this month.

Mr. Bush’s latest round of “oil diplomacy” proved more fruitful than a trip in January, during which Saudi Arabia, the world’s biggest producer and a U.S. ally, flatly rejected his pleas for increased output. Yesterday, the Saudis used the occasion of his visit to announce a 300,000 barrel-per-day increase in production, mostly for U.S. customers.
click for larger image:

“The president has asked the Saudis to produce oil to meet demand,” Tony Fratto, a White House spokesman, told reporters in Riyadh. “He was reassured by the king that they have increased production as the market demands.”

But the move to suspend shipments of premium crude oil to the strategic reserve was a reversal of longstanding administration policy and a bow to Congress, where Republicans overwhelmingly sided with Democrats against adding to the reserve while oil prices are soaring to unprecedented levels.

The administration has cited national security reasons for steadily raising the amount of oil in the emergency reserve to 702 million barrels from 540 million barrels in 2001. With an eye on Mr. Bush’s legacy during his last year in office, White House officials have stressed that they prefer long-term solutions over short-term fixes for energy problems.

They predicted the move would only lower oil prices by 3 or 4 cents a barrel — not enough to make a difference at the pump.

Nevertheless, the administration agreed to stop 13 million barrels of shipments between July 1 and the end of the year — an amount that would have gone halfway toward completing the job of filling the 727-million barrel reserve, which is stored in salt caverns along the Gulf Coast.

The more substantive move came from Saudi Arabia, which is the only oil producer with the capacity to significantly increase production. Saudi Oil Minister Ali Naimi told reporters in Riyadh that the increase, which went into effect last Saturday, is intended to make up for recent output losses from other U.S. suppliers, including Nigeria, Venezuela and Mexico. It would lift the kingdom’s output to a total of 9.45 million barrels a day by June.

“Any demand for extra production capacity from consumers will be immediately met,” he said.

While Saudi Arabia is the most influential oil producer worldwide, even the kingdom has little ability to dictate world oil prices, which reflect the tight margin between robustly growing needs for fuel in China and other developing countries and strained oil production that is running at full tilt in most countries outside the Persian Gulf.

In addition, Saudi Arabia’s ample supplies of crude can make little difference during the peak U.S. summer driving season, which begins on Memorial Day, when prices usually crescendo. That is because American drivers are required by environmental laws to switch to especially clean blends of gasoline that are difficult to make from Saudi crude, which has a high sulfur content. Premium U.S. gasoline and diesel fuels are most easily made from premium crudes that are light in sulfur content.

Most of the oil produced worldwide as well as in Saudi Arabia is heavy, thick and high in sulfur, thus requiring more intensive refining to turn it into clean-burning fuel. Analysts say this mismatch between the crudes most widely available and the clean gasoline increasingly demanded by consumers will get worse in the future and keep pressure on fuel prices.

“Some analysts believe heavy-sour production is going to significantly exceed light-sweet production as time goes on,” said Toni Johnson of the Council on Foreign Relations. “Under such conditions, when major suppliers like Saudi Arabia seek to boost production to ease prices they sometimes have trouble finding buyers because their surplus production is mainly lower-quality crude.”

Story Continues →