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Saudi curbs on oil output drive up cost

Forecasts of easing prices hurt by sabotage in Iraq

WASHINGTON -- As Americans face near-record prices for a gallon of gasoline -- more than $2 a gallon in some parts of the country -- the world's largest petroleum-producing nation is rationing supply to drive crude costs higher.

Since the removal of Iraqi dictator Saddam Hussein, Saudi Arabia has curbed its oil output by more than a million barrels a day to keep prices above $22 to $28 a barrel, the range preferred by the Organization of Petroleum Exporting Countries. The result: The price of oil has climbed above $30 a barrel and looks like it could stay that way for some time.

"The war was supposed to at least moderate prices," says Edward Chow, an oil consultant and visiting scholar at the Carnegie Endowment for International Peace in Washington. "Now everyone, especially the Saudis, is enjoying artificially high prices."

This is not what the White House wanted as it prepared its war plans for Iraq. Bush aides failed to anticipate the scourge of looting and guerrilla raids on Iraqi petroleum fields that has reduced the country's oil exports to a trickle. Not only is the administration deprived of the petrodollars it thought would be available to pay for post-war reconstruction, the Saudi move to limit its own output has contributed to spiraling gasoline prices ahead of a Labor Day weekend expected to be one of the busiest on record. Energy costs are expected to creep higher with the increase in seasonal demand as temperatures cool and problems in oil-rich Venezuela and Nigeria continue to limit global supply.

"For those who thought the juice would flow after the war, this is a real disappointment," said Jared Bernstein, a senior economist at the Economic Policy Institute in Washington.

Instead, the torrent of Iraqi crude that was supposed to flood the market after the war has yet to materialize, easing pressure on Saudi Arabia and other oil producers to raise output and protect their market share.

Tight oil supplies have frustrated hopes, expressed largely in private by some administration officials, that a successful war in Iraq would allow the United States to wean itself from Saudi oil and compel its authoritarian regime to become more responsive to US interests in the region.

In July 2002, a Pentagon advisory panel called the Defense Policy Board heard a briefing that condemned Saudi Arabia as an enemy of the United States and a key sponsor of Islamic terrorism. The speaker, Rand Corp. analyst Laurent Murawiec, recommended the US order the Saudi government to stop what he said was extensive support for radical Muslim groups and invade Saudi oil fields if it failed to comply. He characterized the Saudi monarchy as a chief financier of radical Islamic groups that would be "pushed back into its extremist corner" if moderate regimes were established in the Middle East.

Administration hawks have "talked about this for a long time," said James Akins, an ex-US ambassador to Saudi Arabia. "They thought they could take Iraq and tell the Saudis to go to hell. It's not as easy as all that."

The Saudi embassy in Washington and the Pentagon did not return calls seeking comment. In the past, the Saudi government has strenuously denied it fosters terrorism or supports militant Islamic groups, and the White House has consistently described the monarchy as a close US ally.

Prior to the war, Iraq was pumping 2 million to 2.5 million barrels of oil a day, plus an unknown quantity of contraband crude. That's not far below its peak capacity of about 3 million barrels reached in the 1980s. Bush administration officials said before the war they hoped Iraq would resume pumping to capacity following Hussein's removal and within a few years enhance output to 5 million barrels a day.

Though White House officials insisted the war was not about Iraq's oil, they saw oil-related dividends of a post-Hussein Iraq. "When there is a regime change in Iraq, you could add 3 million to 5 million barrels of production to world supply," Larry Lindsey said a year ago in remarks that were quickly disowned by the White House and followed by his resignation. "The successful prosecution of the war would be good for the economy."

Nearly five months after the fall of Baghdad, it is Saudi Arabia that has staged an economic rebound, Iraq is mired in post-war disarray and US consumers face higher energy costs. According to the World Bank, average annual per-capita income in Saudi Arabia contracted by 1.1 percent between 1990 to 1999. But since the beginning of this year, as talk of regime-change in Iraq intensified and oil prices began their ascent to a pre-war peak of $40 a barrel, Saudi Arabia has earned some $50 billion in petroleum sales and is expected to raise about $85 billion for the year, according to the Riyadh-based Saudi American Bank.

The kingdom's economy is likely to grow by nearly 7 percent this year, its strongest performance in a decade, the country's stock exchange is up 55 percent, and its budget and current account are posting strong surpluses.

Stephen J. Glain can be reached at glain@globe.com.

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