Saudis to Boost Oil Production Capacity as Price Hits $50
September 28, 2004
By JAD MOUAWAD
PARIS, Sept. 28 - The price of oil, which has been rising
for the last two years, broke through the $50-a-barrel mark
today, reaching a new milestone as some analysts warned
that there was nothing to stop prices from rising further.
Fueling these gains is an exceptional alignment of events:
record high demand, historically low spare capacity, and a
set of potentially destabilizing events in some of the
world's top oil regions, including Iraq, Russia, Venezuela
"The market is looking for a new equilibrium point and no
one knows where that will be," said Jamal Qureshi, an
analyst at PFC Energy, an oil consultant based in
Washington. "We still have a way to go. I wouldn't be
surprised to see $60 a barrel."
On the New York Mercantile Exchange, oil for November
delivery closed at $49.90 a barrel today, a record high for
a closing price when adjusted for inflation. Earlier in the
session, futures rose as high as $50.47, setting a new
record. Oil prices - up nearly 55 percent this year - have
doubled in two years.
What pushed prices up this week was news of possible
clashes between the army and rebel militants in Nigeria
that could threaten the country's oil production, and the
consequences of Hurricane Ivan last week in the Gulf of
Mexico, a region that makes up a fourth of American
domestic oil production.
At the same time, demand for oil is running at a pace not
seen since 1978. The world is expected to consume nearly 1
billion more barrels of oil this year than it did last
year, driven by strong and sustained demand coming from
China, India and the United States.
Saudi Arabia, the world's top oil producer, responded today
with a pledge that it would raise production capacity to 11
million barrels a day, from 9.5 million.
Ali al-Naimi, the Saudi Arabian oil minister, had mentioned
the increase in capacity earlier this month while meeting
with fellow OPEC oil ministers in Vienna. "The kingdom is
ready and capable of making up for production shortfall
occurring anywhere in the world," Mr. Naimi was quoted as
saying by the official Saudi Press Agency.
This is the second time oil prices have hit record highs in
recent weeks. On Aug. 20, crude oil futures touched $49.40
during trading but within days fell back to about $43 a
barrel. Eric Bolling, an independent oil trader on the
Nymex, said this rise might be different. He referred to
the oil market as going through a "perfect storm."
After the passage of Hurricane Ivan over Florida, the
cumulative loss of production from the gulf region had
reached 11.8 million barrels, or about 1.9 percent of the
yearly output there, said the Minerals Management Service,
an Interior Department agency. A third of the region's
production is still not making it to markets.
To make up for the shortage, oil companies in the United
States have been drawing on their stocks, which are near
29-year lows. In turn, that leaves less oil to refine into
either gasoline or heating oil necessary for the seasonal
winter peak in demand. Mr. Bolling said: "There's
underlying strength to $50 this time. A lot of things have
happened since $40."
"I'm going to wait till the market gives me a signal we've
reached a ceiling" before betting oil contracts will fall,
he said. "We're not there yet."
Since most oil producers are pumping full out to meet
record-high demand, little spare capacity is left in the
system. High prices reflect the lack of any substitutes for
any interruptions in production anywhere, analysts said.
OPEC's spare capacity - idle production that can be brought
on when needed - has sunk from about 15 million barrels a
day in the mid-1980's, to around 1 million to 1.5 million
"The market is much tighter today than it's been since
1973," said Daniel Yergin, chairman of Cambridge Energy
Research Associates. "Unlike 1973, 1979 or 1990, the market
today is going through a demand shock, not a political
shock. Also, the market is not thinking long term. It's
thinking day to day."
Last month, oil traders were concerned that the fighting in
Iraq would spill over and hurt that country's oil exports.
Earlier this year, it was the continuing tussle between the
Russian government and Yukos, Russia's top oil producer,
that kept oil markets on edge.
Earlier still, bombings in Saudi Arabia reminded traders
that the kingdom, which holds a quarter of the world's oil
reserves, is still a terrorist target.
"What's unnerving the markets is that significant
disruptions could come from a number of sources," said
Steve Turner, an oil analyst at Commerzbank. "It's possible
that prices could go substantially higher given the right
set of circumstances."
Even OPEC cannot do much more to bring down prices. Members
of the Organization of Petroleum Exporting Countries, which
accounts for a third of the world's oil production, are
pumping about 30 million barrels a day, the group's highest
output in 25 years.
And the renewed Saudi announcement to increase capacity may
not have much of an impact either, analysts said, because
most of the additional Saudi barrels are of a heavy type
that is less favored by refiners around the world.
Still, with the Qatif field coming online, Saudi production
of Arabian light crude - a type that is in demand because
it is well suited for gasoline refining - is expected to
increase by 500,000 barrels a day.
"That should help on the margins," Mr. Qureshi of PFC
So far, high oil prices have not hurt global economic
growth. Both the Federal Reserve and the European Central
Bank said recently that oil prices have not slowed the
economic recovery or contributed to inflation in either
Part of the reason is that modern economies are much less
dependent on oil than they were in the 1970's. Also,
adjusted for inflation, oil prices are still historically
lower than their peak of March 1981, when crude reached
nearly $80 a barrel in today's dollars.
Still it does not mean the world is immune to high oil
prices. In France, Budget Minister Dominique Bussereau said
Monday that French growth would slow by 1 percentage point
next year if oil prices remained above $50 a barrel,
according to Bloomberg News. The French government expects
2.5 percent growth in 2004 and 2005.
Hans Eichel, the German finance minister, also added his
voice to warnings that global growth would be at risk if
oil prices remained at current levels.
Higher energy costs could hurt company earnings, depress
stock markets, curtail consumer spending and eventually
slow growth. Analysts usually expect a $10-a-barrel
increase in oil prices to shave off 0.3 to 0.5 percentage
points in gross domestic product growth.
Not everyone is convinced that oil prices can stay high for
too long. "Oil prices don't exist in a vacuum," Mr. Yergin
of CERA said. "People generally underestimate the feedback
effect on the economy. Markets adjust. The question is do
they do it smoothly or painfully."
Part of the reason prices rose this year is that demand
turned out to be much stronger than anyone forecast.
In December 2003, the International Energy Agency still
expected global oil demand for 2004 to be 79.6 million
barrels a day. By August this year, the I.E.A. had
increased its estimates for global oil demand to 82.2
million barrels a day. The difference - 2.6 million barrels
a day - is more than the daily output of an oil producer
Much of the increase in demand comes from developing
economies, particularly in Asia. China, for example,
accounted for 40 percent of the growth in world oil demand
over the past four years and last year surpassed Japan as
the second-largest consumer of oil after the United States.
America's infatuation with sport-utility vehicles is also
to blame for the increase in oil demand. The vehicles and
other light-trucks account for half the car sales in the
United States and are behind a 1.9 percent increase in
demand for gasoline, according to the federal Energy
Oil demand in the United States this year is expected to be
2 percent higher than in 2003, averaging 20.4 million
barrels a day.
This oil-price rally started in December 2002, when oil
workers in Venezuela joined a nationwide strike against
President Hugo Ch·vez. The protest movement eventually
brought the country's oil industry to a halt - 3 million
barrels of oil a day, or about 4 percent of the world's
daily production, suddenly went missing.
Then clashes in Nigeria crimped production there. And in
March 2003, the war in Iraq brought fears that Saddam
Hussein would order the destruction of the Iraqi oil
OPEC initially raised its output to make up for the loss of
Venezuelan production. But it quickly started to worry that
the return of Iraq's oil production after the war would
flood the market with oil. In April 2003, OPEC called for a
cut in production and then reduced its nominal output
ceiling twice by February 2004.
By then, the Russian government had gone on the offensive
against Yukos, prompting fears exports would be cut. Only
in June did OPEC finally reverse course and increase its
output ceiling. By then it was too late to stem the price