International: Jeddah meeting

Monday June 23

The rise of crude prices to nearly 140 dollars per barrel has been accompanied by signs that the world economy can no longer sustain such prices without a serious recessionary impact, affecting not just consuming countries, but producers through demand destruction and product substitution.  This combination appears to have sparked concerns in Saudi Arabia, which hosted a high-level meeting of oil producers and consumers in Jeddah on June 22.

However, that the Jeddah meeting was called at all was perhaps more significant than the announcements made on the day, which provided little of substance:

• Notably, the meeting failed to hide the existing divisions between consuming and producing nations over the causes of the rise in crude oil, and thus their likely policy responses over the medium term.

• Saudi Arabia made it clear that it believed fundamentals were not the cause, sticking to its stance, which is also that of OPEC, that both downstream bottlenecks in the refining system and speculation by financial investors are primary drivers.

• Consuming nations stuck to their argument that the main cause is a fundamental lack of supply, not least the result of restricted access to resources.

Saudi Arabia did announce that it would raise its crude oil production to 9.7 million barrels per day (b/d) and also said that it was ready to produce more crude beyond 9.7 million b/d should consumers require it.  This promise should serve to calm oil markets, but Saudi Arabia has maintained the stance for some time that it would deliver more crude if asked by customers.

More significantly, the meeting demonstrated that Saudi Arabia is prepared to act independently of OPEC, the other members of which have little or no spare capacity.  Both Iran and Venezuela expressed criticism of Saudi Arabia's unilateralism, and Riyadh's decision will have repercussions for OPEC cohesion down the line.

However, in the short term it remains unclear how far Saudi Arabia's unilateralism can cool the oil markets.  Key factors have not been removed from the equation; notably the rise in tensions with Iran over its uranium enrichment programme and the possibility of an Israeli strike against Iranian nuclear facilities. In addition, an increased supply of heavy Saudi Arabian oil will not translate quickly into a recovery in OECD oil stocks as the usually high-demand US driving season gets underway.