Saturday, June 21, 2008

Pump More Oil for Lower Prices

Critics of the oil industry and have developed their own brand of economics. They think it's possible to tax oil companies into lowering prices. However, before hitting them with punitive taxes, the master plan included barring oil companies from drilling vast tracts of US territories that contain proven reserves of over 100 billion barrels. They've been barred from exploiting those territories, and now prices are rising. Global oil consumption continues to rise, but domestic production is not permitted to expand. Foreign sources are moving too slowly to increase their production. Why should they? Many oil companies are simply the governments of the oil producing countries. Why would they take steps that aimed at reducing oil prices when the only outcome is a decline in national income? All the oil-rich middle east nations obtain almost every penny flowing into their countries from international oil sales. There is no internal competition among oil producers. Hence, they will maximize their revenue by limiting supply. The US should force the playing field onto a different level -- a level in which American oil production is the "swing factor" that drives prices. Instead, we send billions of dollars and thousands of jobs to middle east countries with a professed hate for the US, the West and Israel. We do this even though we have extensive, untapped reserves to exploit. Bringing that oil to market would employ Americans working in the US earning high pay while fighting an economic war that middle-east and other unfriendly nations are waging against us.

The U.S. energy secretary, Samuel Bodman, said Saturday that insufficient oil production, not financial speculation, was driving soaring crude prices.

The U.S. and many other Western nations have put increasing pressure on Saudi Arabia, the world's top oil exporter, to increase production. Saudi officials have been hesitant to do so, arguing that soaring prices have not been caused by a shortage of supply.

Bodman disputed that assertion Saturday, saying oil production has not kept pace with growing demand, especially from developing countries like China and India.

"Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices," Bodman told reporters. "There is no evidence that we can find that speculators are driving futures prices" for oil.

He said commodities markets have experienced a huge influx of money from financial investors in recent years, but they have been following the market upward rather than driving the increase in the price of oil.

Saudi Arabia called the unusual meeting in Jiddah between oil producing and consuming nations as a way to show that it was not deaf to international cries that high oil prices have caused social and economic turmoil.

While Saudi Arabia has been reluctant to drastically increase production, it has announced several small increases recently that it says were made to satisfy increased customer demand. The country has consistently said that it will produce enough oil to ensure the market is supplied.

The kingdom increased oil production by 300,000 barrels a day in May, and a Saudi official confirmed Saturday that the country would add another 200,000 barrels a day in July. The official spoke on condition of anonymity because of the sensitivity of the information.

Saudi Oil Minister Ali al-Naimi also confirmed the increase ahead of the conference. But neither announcement has done much to stem the run-up in the price of oil, which closed near $135 on Friday.

Saudi assistant oil minister, Prince Abdulaziz bin Salman, said that Saudi Arabia has been working with several international organizations to put together a background paper to focus Sunday's discussions and reiterated that the kingdom was ready to meet demand from its customers and foster stable prices.

He said it would be "wrong" to judge the success of the meeting by oil prices the day after it ends.

Many countries around the world have experienced social unrest by populations angry that rising fuel prices have driven significant increases in the cost of food and other basic goods.

Bodman said that every 1 percent increase in the demand for oil requires a 20 percent rise in price to balance the market. Demand in China, India and the Middle East has been soaring in recent years as the countries consume more energy to fuel economic growth.

Rising demand in the developing world has coincided with historically low levels of spare oil production capacity, which fell below two million barrels per day among OPEC countries in May for the first time since the third quarter of 2006, according to the International Energy Agency.

Bodman made clear that the responsibility for reducing oil prices did not simply fall on the shoulders of producing nations, saying consuming countries must increase energy efficiency and invest in the development of alternative fuels. But he saved his strongest words for oil producers like Saudi Arabia, who he said must step up long-term investment in production and spare capacity.

Saudi Arabia is completing a $50 billion plan to increase capacity to 12.5 million barrels a day but has signaled it would not go beyond that.

CNBC said Saturday that Saudi Arabia's current capacity is 11.3 million barrels per day, quoting al-Naimi's adviser, Ibrahim al-Muhanna. Previous estimates by the International Energy Agency put current Saudi capacity at about 10.7 million barrels per day. The kingdom currently produces about 9.5 million barrels per day.


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