‘I'll come with new weapons; you come with more oil,'

Bush urges Saudis to boost oil output

SHAWN McCARTHY

Tuesday, January 15, 2008

U.S. President George W. Bush on Tuesday urged Saudi Arabia to increase oil production to ease sky-high petroleum prices, but, at the same time, continued his war of words with Iran, a dispute that has contributed to higher crude costs.

Analysts said Mr. Bush was putting the Saudis in an uncomfortable position by publicly urging them to open up the taps at a time when many members of the Organization of Petroleum Exporting Countries worry that slowing world growth could reduce demand for their crude and drive prices lower.

“Saudi Arabia will find it very, very difficult to accept or follow George Bush's suggestions,” Fadel Gheit, an analyst with Oppenheimer & Co., said Tuesday. “It's a desperate move; he's throwing a ‘Hail Mary pass.' But I don't think he's going to get anywhere with it.”

Saudi Oil Minister Ali al-Naimi, said his country is carefully monitoring oil markets but believes they remain well supplied with crude.

Mr. Gheit said the dramatic increase in world oil prices in the past year has less to do with supply and demand fundamentals, and is more driven by political risks in the Middle East and Nigeria, by the sharp decline in the U.S. dollar, and by speculation.

A key concern has been the dispute between the United States and Iran over the latter's nuclear program. Following an incident in the Persian Gulf last week in which Iranian patrol boats approached U.S. warships, yesterday Mr. Bush warned the oil-producing state that it would face “serious consequences” if any U.S. ship is attacked.

In Riyadh, Mr. Bush said U.S. consumers are feeling the pain of record crude prices, which briefly topped $100 (U.S.) a barrel this month.

“When consumers have less purchasing power, it could cause the economy to slow down,” the President told reporters travelling with him. “I hope OPEC nations put more supply on the market.”

OPEC meets on Feb. 1 to discuss their output, and Saudi Arabia –the U.S.'s closest ally in the group – is the only member to have significant spare capacity.

The organization has said its members worry that the global slowdown will undermine demand for their oil, and drive down prices.

James Williams, an energy analyst with WTRG Economics, said Mr. Bush's plea to the Saudis comes as the kingdom has spent billions of dollars to increase its productive capacity. Saudi Arabia announced in 2005 that it intended to boost its capacity to 12 million barrels a day, up from about nine million.

Mr. Williams said the Saudis are expected to soon bring into production 500,000 barrels a day of high-quality, light crude oil, which could displace some of its current volumes of heavier oil. So, while its overall volumes would remain the same, the additional supplies of light oil would put pressure on the benchmark crude prices, which track the higher-quality crude oil.

The economist suggested there may be a quid pro quo at work between Mr. Bush and his Saudi allies. The president announced a $20-billion weapon sale to the Arab nation during his visit.

“The deal would be: ‘I'll come with new weapons; you come with more oil,'“ Mr. Williams said.

© The Globe and Mail

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