Page last updated at 23:05 GMT, Thursday, 19 June 2008 00:05 UK

Can Saudi summit lower oil prices?

By Andrew Walker
Economics correspondent, BBC News

Saudi motorist
Saudi Arabia has said it will boost oil production next month
It will be, according to the summit's own website, a momentous event.

Saudi Arabia has invited senior figures from energy producing and consuming countries to discuss what to do about oil.

It was a rather stark development in the oil market that seems to have prompted the Saudi authorities to call this meeting - the relentless rise of the cost of crude oil, which this week came within a whisker of $140 a barrel in New York.

'Badly-timed boost'

It has been a remarkable 10-year climb in the price of crude oil.

A decade ago, demand for oil weakened following the Asian financial crisis.

That coincided with a badly-timed boost in production by the producers' group Opec. The price went to about $10.

It was a dismal time for the oil producers' organisation.

Amazingly, some analysts believe the fear of making a similar mistake still haunts some of them.

It is called the "ghost of Jakarta", after the Indonesian capital where that production decision was taken.

How times have changed since, as strong demand, especially from fast-growing economies in Asia, has helped take the price to new highs.


But do the Saudis care? Or do they really welcome such a high price? And in any case can they do anything about it?

Of course, there is an obvious appeal to having the oil billions rolling in.

But there are dangers. For a start there's politics.

Petrol prices
Rising oil prices have hit consumers around the world

The Saudis care more than some other Opec countries - Iran and Venezuela are the obvious examples - about keeping on good terms with the oil importing developed world, especially the United States.

And there are several ways that high prices could undermine oil sales.

Expensive oil has been a factor behind several recessions going back to the mid-1970s.

Admittedly on those occasions it was more about supply disruptions produced by conflict in the Middle East than it is now, but it is perfectly possible that the high price could aggravate the economic slowdown in the United States.

Expensive oil means consumers have less to spend on other things, it hits company profits and several central banks are considering interest rate increases to curtail the inflationary impact.

Falling demand?

Another concern is that high prices can persuade users to find alternatives or to economise.

Already there have been some signs of this as some American car buyers shun fuel-hungry vehicles for something more economical to run.

In developing countries fuels are often heavily subsidised.

The high price is putting a huge strain on government finances. A number of governments - including the world's second largest oil consumer China - have taken the unpopular step of passing some of the increase on to users.

As more take such measures, that too could affect demand for oil.

Is there anything much the Saudis can do?

Increase production is the obvious answer. There have been reports of such plans in the last few weeks, including one that, rather strangely, came out through the United Nations' secretary general Ban Ki -Moon after a visit to Saudi Arabia.

There has been some speculation that at the Jeddah meeting the Saudis will at least indicate that they are willing to sell more oil in the coming months.

Capacity constraints

Would it help? Perhaps a little.

But part of the problem is that much of any extra Saudi production is likely to be heavy oil, which is more difficult for refineries to process.

There is a global problem about refinery capacity, but it is particularly acute for those with the equipment for getting the best yields of valuable products such as petrol from heavy crude oil.

As for the rest of Opec, they have very little spare capacity to produce more oil in the short term at the last.

An official from one member, Iran, is reported to have said that any unilateral production increase by Saudi Arabia would be "wrong".

In conclusion, don't bank on anything being any cheaper at the pump on Monday when the event is over.

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