Page last updated at 14:42 GMT, Sunday, 22 June 2008 15:42 UK

Who wants oil prices to fall?

By Nils Blythe
Business correspondent, BBC News

There's been an international shouting match about why the oil price is so high.

Worker checks over oil pumps in Iran
Opec members blame speculators for high oil prices

On one side, the oil producers cartel Opec yells that there's plenty of the black stuff available and the price is being forced up by "speculators".

On the other side, the big oil consuming countries shout back that the real problem is supplies have failed to keep up with demand - so would Opec kindly start producing more.

In fact, the two arguments are both partially true.

The balance between demand and supply is very tight.

In that tight market even a rumour of supply disruption can send prices soaring, yielding huge profits for traders.

And after each lurch upward, the price seems to settle at a higher level.

Market forces?

This brings us rapidly to the role of Saudi Arabia.

Saudi Oil Minister Ali al-Naimi (image from May 2008)
Saudi Arabia offers the best hope for consuming nations

It's the world's largest oil producer and the only one which the markets think could rapidly increase its output, though how much and how quickly is a matter of intense debate.

But does Saudi Arabia really want to bring oil prices down?

The old argument in Opec was that if prices went too high, developed countries would plunge into recession and - in the long run - the price would collapse.

In recent times that simply hasn't happened.

In 1999 the average price of a barrel of oil was less than $13. In 2007 it was about $72 and still the world economy was booming.

Only now - with oil over $130 - are the cracks beginning to appear, with a marked slowdown in America and Britain.

Golden opportunity?

But arguably this has more to do with the credit crunch and the bursting of housing market bubbles than the soaring cost of hydro-carbons.

Cars queue outside a petrol station in Chengdu
Demand for oil is soaring across the world

And demand for oil from China and India just keeps on growing - and may continue to do so even after the recent reductions in government fuel subsidies.

So, put simply, Saudi Arabia may have its political reasons for wanting to help allies like America with increases in oil production. But it has little economic incentive to do so.

Of course, you might think that for a producer, high prices are an opportunity to make big profits.

But this ignores two really fundamental truths: there is only a finite amount of oil in the world; and no-one knows quite how much.

Saudi Arabia is believed to have by far the largest reserves - with something like one fifth of the world's total.

But as Saudi's oil production is in the hands of a tight-lipped, state-owned company it is hard to be sure of these estimates.

Those who believe that the world is very close to its maximum production already - the so-called 'peak oil' theory - point to the uncertainties about how much more Saudi Arabia can actually produce.

But for the oil consuming countries Saudi arabia is still the best hope. Not least because its two nearest rivals in terms of reserves are Iran and Iraq.

Long game?

All this the Saudis know well.

So when talking to their customers they tend to take a very long view.

As already mentioned, oil reserves are finite.

The less they produce now, the more they'll have in future generations.

Oh, and if this means the price happens to stay high, well so be it.


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