In Bob Woodward's new book, "Plan of Attack," he claims that the Saudis promised President Bush to raise oil production in order to keep oil prices down in the run-up to the November election. On May 10, Saudi Oil Minister Ali al-Naimi declared that the OPEC should raise its production quotas by at least 1.5 million barrels a day, and the price promptly fell by a dollar from its recent high of $40 per barrel.
Oil at $40 a barrel should not be such a big a deal, really. That's higher in dollar terms than it has been since 1990, but the U.S. dollar has lost a third of its value over the past two years, so for everybody else (including the oil producers), the real price hasn't gone up all that much. Even for American consumers, things aren't as bad as they were during the 'oil shocks' of 1973 and 1981: the current U.S. pump price of around $1.75 a gallon compares favorably with the inflation-adjusted price of $2.97 a gallon in 1981.
But it is a big deal, for three reasons. One is the impact on President Bush's re-election campaign of consumer outrage at the pumps. The second is the risk of a new world recession: it was soaring oil prices that triggered three of the past four global recessions, in the early '70s, the early '80s, and the early '90s. The third is that a serious recession could have hugely destabilizing effects in China.
Americans pay far less to fill their cars than any other industrialized country, but they are hypersensitive to price rises: Mr. Bush could be punished at the polls in November if the price at the pump is still sky-high. So will this happy coincidence of a Saudi call to raise OPEC production and bring the oil price down save him from that fate? Maybe not.
What has actually been happening since last September is that OPEC has figured out how to raise prices without cutting production. It has repeatedly announced that it will cut production because it fears that over-supply will make the price fall. The market responds by bidding the price of oil up - and then OPEC doesn't really cut its production after all, so its members get to enjoy both high price and high production.
Nice trick, but how does it work? Partly it's just that the OPEC members are cheating on their quotas less than they used to. The steep fall of the U.S. dollar especially upset the big Middle Eastern producers who dominate OPEC, because while they are paid for their oil in dollars, they buy most of their imports from Europe, where the dollar doesn't go very far any more. They had to jack the dollar price of oil up just to balance their budgets, so they actually managed to cooperate.
So the oil price will stay high no matter what the Saudi oil minister says. It may drift down a bit during the northern hemisphere summer, but it will soon bounce back up again. That doesn't just mean angry American voters; it also means that we are sitting on the brink of a global recession. It would probably take an even higher spike in price to push us over the brink, but that is distinctly possible. It could be caused by violence that interrupts Saudi oil exports, for example - the terrorist attacks at Yanbo on foreign oil-industry employees on May 1 have already started an exodus from the kingdom - or by a decision by OPEC to demand payment in euros rather dollars.
The recession would start in the United States, where a massive budget deficit, an equally big balance of payments deficit and the soaring cost of the war in Iraq make a collapse of confidence quite likely. Recession in America would quickly spread to China, whose growth is heavily dependent on the United States' ability to take its exports. And the U.S.A. and China together accounted for two-thirds of global economic growth last year: if they go, everybody goes.
Gwynne Dyer
is a London-based independent journalist whose articles are published in 45 countries.
