Oil Prices and Saudi Promises

Last Friday Saudi Arabia promised to increase oil output by about 2 million barrels per day. Nevertheless, after a temporary blip downward, oil prices have continued their climb, today reaching nearly $42 per barrel.

Why does the price of oil keep marching higher, even in the face of gestures from Saudi Arabia that they will start increasing supply? In large part, it seems, because Saudi promises are seen as just that – gestures, rather than actions.

The interesting question is therefore this: why hasn’t Saudi Arabia taken more aggressive steps to try to moderate the price of oil? One could argue that they have some good reasons to try to bring the price of oil down a bit – both political and financial. Politically, the Saudis probably have more to gain from a Bush second term than from a Kerry presidency, in addition to the long-standing close relationship between the Bush family and the Saudi royal family. Bob Woodward reported that there was even an explicit arrangement between the Saudis and Bush about reducing the price of oil this year. Financially, the Saudis know that it would be wise to avoid keeping oil prices high for so long that it would encourage significant movement toward greater energy efficiency.

So the fact that the Saudis aren’t in a hurry to increase production suggests a couple of things. First, they may not think that oil prices are high enough right now to have any serious effects on encouraging energy efficiency. Second, they may believe that the price of oil will moderate on its own over the next year, making increased supply unnecessary. Third, they may now be unable to fulfill their promise to Bush because the resulting political and media spotlight would be too intense. Most likely some combination of these factors is at work – with the result that Saudi Arabia seems unlikely to step in and seriously increases supply any time soon.