When global oil producers and consumers meet in Jeddah today, their main concern will be how to defuse the price bomb.
The task already looks daunting: how could they defuse an explosive device when they have been haggling on its cause.
On the one hand, producers argue that the market is well supplied and there is no need for more oil. On the other hand, consumers reject such a theory and want producers to pump more as they have nothing to lose.
On the contrary, by opening up its oil taps, 13-nation Organisation of Petroleum Exporting Countries (Opec) would not only earn more petrodollars, but would also silence those who are calling its bluff.
But does Opec really believe its own arguments that speculation is driving prices. Many analysts suspect the cartel fears that more oil could depress prices and once they begin their fall, it will be difficult to stop them.
As they continued their climb, oil prices have drawn more and more theories and scenarios about the rise. They became even more elusive this week when they approached a new historically high level of $140 a barrel despite Saudi Arabia's announcement it would boost supplies by 200,000 bpd.
In theories, the arguments of both producers and consumers are taken into consideration. The market needs more oil because demand is strong, speculation is pushing up prices, the weak US dollar is keeping prices high, and the low spare capacity is creating psychological fears of a supply disruption.
Many other reasons have been cited. Although they all sound logical, some of them have become a bone of contention between the producers and consumers.
For this reason, the two sides need to narrow the gap in their views about the causes of the surge in prices in order to be able to find a solution. In other words, producers and consumers should look into the root cause.
Perhaps also for this reason Saudi Arabia, the world's dominant oil power, has called the Jeddah meeting. The Kingdom appears to believe that efforts are needed from both parties to bring prices to a reasonable level.
"The participants in the Jeddah meeting need to devise a plan or strategy to tackle this serious rise in oil prices, which now threaten many economies, especially the non-producing nations," said Baheej Abu Hamza, Chairman of Union of the Lebanese Oil Companies.
"The agenda of this conference must include discussion of the root cause of the increase in oil prices. They should not look at the face of the problem because this will lead to an inefficient solution. Boosting oil production alone might not push down prices because there is a political side as well."
Saudi Arabia, which controls nearly a quarter of the world's proven oil wealth, has been under pressure from the West to pump more crude as it is the only producer in the world to possess sufficient spare capacity, estimated at nearly two million bpd, more than two thirds of Opec's available capacity.
The Kingdom, Opec's de facto leader, which produces a third of the cartel's oil exports, sees the present oil price level as too high and analysts believe the desert Gulf nation favours a price of around $70-90 a barrel.
But Riyadh has been reluctant to pump more oil as it apparently fears this could lead to a price collapse. Other Opec members seem to share that view. In its monthly report last week, the London-based Centre for Global Energy Studies (CGES), said oil prices could start weakening only if there is a global economic recession in the absence of major output increases.
It also doubted Opec's claims that the market is well supplied and called the cartel's claim a bluff.
"Some months ago, we suggested high oil prices seem to have been tacitly accepted by those oil-consuming-country governments pursuing environmental and energy independence policies, which would obviously be helped by high energy prices. We argued that their acceptance of high oil prices would continue as long as they did not have an adverse impact on the real economies of the industrialised world. That point has now been reached, although the full impact has yet to be felt," said CGES, which is owned by former Saudi Oil Minister Sheikh Ahmed Zaki Al Yamani.
"What will it take to stop the rise in oil prices? If the Opec member countries will not boost production, then, in the absence of non-Opec supply growth, only a slowdown in demand will remove the upward pressure on oil prices. In short, a recession that is deep enough and wide enough to affect oil consumption in the developing countries of Asia as well as the developed ones of the OECD."
CGES cited arguments that the world is about to experience a deep recession, but added that until its impact is felt around the world crude prices will continue to rise.
"When they start to fall, the drop is likely to be steep. Perhaps the time has come for Opec to put its assertion that more crude oil will not help bring down prices to the test. After all, they have nothing to lose if they are proved correct and everything to gain by silencing their critics," it said.
"Perhaps the real reason that they have not yet done so is that they do not really believe their own assertions – knowing fully well that more supply will drive down prices. Their real fear, perhaps, is that once prices begin to weaken, they will be very hard to stop. The longer Opec delays, the more likely recession becomes, as prices continue to rise."
In another analysis, CGES deputy director Leo Drollas cited 10 major factors, which he said had been causing the price surge. Apart from speculation, low spare capacity, and strong demand, they include a decline in inventory cover, high marginal costs, slow growth in non-Opec supplies and "peak oil" fears.
Another factor was "Opec's oil price ambitions", which suggested that the cartel is happy with the current price level and is the main culprit for their surge.
While soaring prices have hit major consumers and sapped the coffers of developing oil importing nations, they have brought a windfall to producers.
According to estimates by the Energy Information Administration of the US Energy Department, Opec's income will exceed $1 trillion (Dh3.67trn) for the first time this year. They will be nearly $500bn higher than the 2007 revenues and more than 10 times the oil exporting earnings of $103bn in 1998.
Whatever the case Saudi Arabia and its producing allies will push in Jeddah, the other side might still be convinced of the need for additional supplies.
But the most important thing is that both parties need to at least narrow the gap in their theories about the reasons that are driving prices up. And since the Jeddah talks are not expected to produce a magic wand to deal with prices, it could be the start of a serious dialogue to diagnose the problem and find a remedy.
As British Energy Secretary Malcolm Wicks put it when he met UAE Energy Minister Mohammed bin Dhaen Al Hamili in Abu Dhabi this week: "We had a shared concern about the current price level.
"We discussed the complex question of what is now causing the big hike in energy costs and oil prices.
"We agreed on a shared analysis and clearly we would like to see an increase in production but some countries may be capable of increasing production, while some may be not because of capacity constraints."
"There is a need for a shared analysis of what is going on because there have been different views about what is causing this situation," Wicks added.
UAE says high demand causing price hikes High oil prices are caused by strong demand in China and India, speculation and a lack of refining capacity in industrialised nations, UAE Oil Minister Mohammed Al Hamili said.
The state news agency WAM quoted Hamili as saying yesterday, when he left to attend a meeting of oil consumers and producers in Saudi Arabia today, that such a dialogue was key to stabilising oil markets and the world economy.
It said Hamili had agreed with British Energy Minister Malcolm Wicks, who visited the UAE this week, that high prices were caused by "strong demand for crude from China and India, speculation on the petroleum market and the situation that international financial markets are going through". It said Hamili also believed a lack of investment in refining in industrialised nations was also affecting prices at a time when "global markets are suffering from a shortage of oil products not crude." (Reuters)
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