3/23/2011 11:06 AM ET|
Can the Saudis save the economy?
We're depending on the House of Saud to replace lost Libyan oil. We also need the Saudis to quiet political unrest in the Persian Gulf. The future of the economy depends on it.
A great horde of disaffected youth stretching from the Moroccan coast to the banks of the Caspian Sea, frustrated by a lack of opportunity and a rising cost of living, has created a wave of political bloodlust. Uprisings already have removed two North African tyrants from power, and one now challenges Libya's Moammar Gadhafi as Western powers deploy air and sea assets in support of the opposition.
Protests that started with a desperate Tunisian fruit vendor have washed over the Middle East, stirring disaffection in such places as Iraq, Iran, Algeria, Oman, Yemen, Kuwait, Syria, Jordan and Bahrain.
The loss of more than 1 million barrels per day of Libyan sweet crude oil production and fears of additional supply disruptions have pushed crude oil prices up more than 40% from last August. Omani and Bahraini oil refinery workers have staged protest strikes over the past week. And Saudi Arabian Shiites have taken to the streets in Qatif, near the heart of the kingdom's oil infrastructure.
Meanwhile, the horrific Japanese earthquake, tsunami and nuclear tragedy is pushing crude even higher as traders anticipate that lost nuclear production of electricity will be replaced by oil and gas.
Where do we find salvation? Because, heaven knows, we need to be saved: Oil has traded near $104 recently and gas prices have pushed toward $4 a gallon -- a price some economists say would tip the economy over.
Do high oil prices mean recession?
A spike in fuel prices driven by political unrest is economic kryptonite, and it's the worst possible problem we could have right now. Rising prices are forcing central bankers around the world to start policy-tightening cycles and move up interest rates. At the same time, higher energy costs tax consumers, reducing spending power.
Keep in mind that every single recession from 1973 on has been preceded by or coincided with a sharp rise in oil prices.
Hapless investors are glued to their trading monitors, subject to daily headline risks and the fortunes of rebel fighters and protesters half a world away. Consumer and business confidence, which had become cautiously optimistic, is sinking again. Wall Street economists are busily marking down their first-quarter and full-year growth estimates.
Since all of this is driven by political unrest and armed rebellion, policymakers in the West are helpless. If the Federal Reserve tries to loosen policy further, it risks making the problem worse by pushing hot, speculative cash into the commodity market and forcing food and fuel prices even higher. Remember that increases in the prices of these necessities are what catalyzed the protests in the first place.
Unlike with the financial crises of the past few years, more cheap money isn't the solution, and the Fed can't be our savior.
Nor can we just, to borrow a phrase, "drill baby, drill": Offshore production in the Gulf of Mexico is as difficult as anything humans have ever done, and opening new fields in, say, Alaska would take years even if it were politically possible. Time is our enemy here. Before higher prices could encourage new production, the damage to the economy would already have been done.
Salvation from the House of Saud
Instead, the future depends on the ability of King Abdullah and the House of Saud to quickly fill the gaps in global crude supplies while also tamping down protests throughout the region. OPEC controls the world's supply of spare oil. And Saudi Arabia is overwhelmingly the largest contributor to that supply.
Moreover, the kingdom sits at the political center of the Persian Gulf. Riyadh is the seat of power for Sunni Muslims. It plays a key role in the struggle to control Iranian ambitions. It is also on the front lines of the fight against al-Qaida's ambitions on the Arabian Peninsula.
Saudi Arabia already has committed itself to filling any oil supply deficits and has worked with European importers to replace lost shipments of Libyan sweet crude.
On the unrest front, more than 1,000 Saudi troops have crossed the King Fahd Causeway to bolster Bahrain's royal family. And now the Saudis are poised to play a role in the future of Yemen as that country's military leadership abandons its president.
While President Barack Obama has been outspoken in his support of rebels in Libya, Egypt and Tunisia, his administration has been less forceful in supporting protests in Saudi Arabia's sphere of influence. The Saudis had previously expressed disapproval of America's abandonment of Egypt's Hosni Mubarak. This is realpolitik at work. Only so much newfound freedom can be tolerated when oil is at stake.
Saudi Arabia is our bulwark, against both an oil supply crunch and an uncontrollable political contagion sweeping across the world's key energy production and transit hub. Whether its leaders are up to the task will determine the course of the economy and stock prices in the months to come.
The most important metric is the balance of crude oil supply and demand. And it's more tenuous than most realize.
Right now, a 1.1 million barrel per day (mmb/d) loss of Libyan production has dropped global spare production capacity to 3.6 mmb/d, according to Credit Suisse. That loss represents 4% of the total global supply. All of the excess capacity comes from OPEC, since non-OPEC production is falling. And more than 75% of OPEC's oil comes from Saudi Arabia.
But this estimate hinges on the belief that Saudi Armaco had around 3.5 mmb/d of extra capacity before the Libyan shutdowns. Some experts aren't so sure. Goldman Sachs suggests that OPEC has less than 2 mmb/d of spare capacity, based on anecdotal evidence that the Saudis have been pumping upward of 1 mmb/d more than the official production numbers since November.
There are other factors at work which effectively weaken the cushion as well. Incremental Saudi production is of a lower grade than the lost Libyan oil. And Morgan Stanley analysts say they believe that only 1.5 mmb/d worth of additional Saudi supply can be put into service within six weeks. Increasing Saudi Arabia's total production capacity would "require close to three months and is likely to prove very costly and challenging logistically," according to Morgan's Hussein Allidina.
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The Arab League of Nations asked for a "No Fly Zone" they got it as well as Billions of foreign aid from American. Well it's time to repay the piper. My opinion. I would suggest a fixed price on oil for the next twenty-five years. Bringing down the price at our pumps would help. America would have some time to develop a workable oil alternative which the oil producers fear.
I've worked with these exploitive sand farmers and all they want is to exploit people. Especially American businesses.
Don't hold your breath on anything fantastic happening.
'Do High Oil Prices Mean Recession?'...
If your hands and feet are bound, have a concrete block chained around your neck, and then you were cast into the sea, does that mean you're going to drown? Get real! Either you've been trying to break Rumplestilskin's record, or you've traded the mantra of journalist for government lackey. The informed are well aware that we've been in a depression for some time now, and the manipulation of oil prices is only one item on a long list of causes.
The idea is to extract the wealth of the nation, and subjugate its people. The players are few, but powerful. The majority know this. Some agency recently released a report that the American people have been able to put about 5% of their money into savings. As I read the article I could imagine corporate America and their front-line political allies salivating. The final squeeze is on, and we're the lemons.
Too bad the underpaid remains of our rapidly dwindling workforce still need to use gasoline in those foreign made cars.
The peaks and valleys for future oil prices has already been charted by the elite in the two-headed serpent that controls our government, and their global cohorts. What can be done? Nothing! Add our country to the list beneath the Roman Empire, Egyptian Empire, Persian Empire, etc.. .
You've GOT to be kidding!!! What a rediculous article!!! KILL the SPECULATORS and we'd all be FINE!!!
As early as 2003 the Saudis had a press conference WARNING us that we have to do something about SPECULATORS. They said they had been selling oil to us in the USA at $24/bbl since RAYGUN but because of the SPECULATORS there was no way it would go below $$38/bbl! It was selling at THAT time at $46/bbl!
They said they have stock in companies and could NOT AFFORD to have the economy wrecked! They didn't want the world wrecked.
Well GUESS THE HECK WHAT??? The speculators ruined the economy. Then we gave them $700 BILLION dollars to steal and re-speculate.
I do NOT want to give MY HARD EARNED MONEY to worthless people looking to do NOTHING for the world than to make unearned money for their bank account at my my country or even the SAUDI"S expense! Kill the speculators one way or the other and I MIGHT believe what you say.
Meanwhile, back at 1600 Pennsylvania Avenue, its just another day of planning the next vacation or golf outing.
1: Congress is also out of session
2: Obama is overseas, in South America, one of the fastest growing economic regions in the world. Brazil in particular is a VERY good business oppertunity...
Anyway, world-wide supply of Oil has been falling for three years now, so its clear we've hit peak oil. The cheap stuff is GONE, and continuing to rely on it is pure idiocy. Its time to finally start to push hydro-fuels, and if that means forcing every gas station to have a fill-up station, so be it.
Either government forces the oil-co's to start moving away from oil, or we live with $5/gal. Your choice.
This isn't about our oil, it's about world markets. "Drill, baby, drill" is stupid. We don't need to drill; we're already the third largest producer of oil in the world. What we need is some sort of market mechanism that keeps that oil at home instead of selling it on the open market We can drill until there's a pump in every back yard, it won't lower the price of oil.
Perhaps an export tariff on our oil producers? Sell it here for $50 a barrel, or sell it overseas and we'll tack on a $50 tax for taking it out of the country. We could call it a national resource that would put our security at risk if we lost it, like we do now with limiting missile technology to other countries.
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