Saudi can banish ghost of 9/11 through OPEC oil surge

www.forbes.com Reuters, 03.07.03, 7:54 AM ET  By Tom Ashy LONDON, March 7 (Reuters) - The United States may not be the only country seeking to banish the ghosts of 9/11 in a war on Iraq. Saudi Arabia, whose citizens dominated the list of suicide plane hijackers, also has a chance to dispel any doubts about its allegiance using OPEC oil policy as its sword, oil analysts said. After 18 months of souring relations with its main Western ally in Washington, the world's top oil supplier is leading a move in the cartel ahead of a meeting on Tuesday to crank up exports to cover for an expected halt from Iraq. The extra oil, mostly from Saudi Arabia, would ease Washington's path to Baghdad by preventing oil prices rising much further, and strengthen Riyadh's role as central banker to the world oil market. "For Saudi Arabia the meeting is a golden opportunity to emphasize to the United States and other allies its role as a reliable supplier after an intense period of frought relations with Washington," said Raad Alkadiri of Petroleum Finance Corp. "For Riyadh it is a chance to shine, particularly in the eyes of Washington," he added. U.S. oil prices last week hit their highest level since the 1990 Gulf crisis at $40 per barrel and economists fear further rises will seriously dent world economic growth.

RESISTANCE Riyadh is pushing fellow members of the Organisation of the Petroleum Exporting Countries to agree a plan to suspend output restrictions when bombs start falling on their Gulf neighbour, delegates say. But it could meet resistance from other members of the group, such as Iran, which have little unused capacity and even less desire to help Washington's war plans. "The Saudis are keen to mend fences with Washington, but don't want to be seen doing so by the Arab street," said Leo Drollas of the Centre for Global Energy Studies. "They are choosing to do it via OPEC and not overtly, by preventing the oil market from exploding and being a reliable supplier of oil," he added. OPEC Secretary-General Alvaro Silva has said he does not envisage any suspension of quotas yet, but he conceded that the 11-member group has already set its output limits to one side to cover for an unexpectedly long strike in Venezuela. "The contingency plan depends on those few countries with spare capacity. If you have the barrels, you will be allowed to produce them," said an OPEC delegate, asking not to be named. Any contingency plan may not be adopted formally, delegates said, but Saudi Arabia wants to put the issue at the top of the agenda at Tuesday's meeting, which is otherwise expected to maintain the current group limit of 24.5 million barrels per day (bpd).

CONTROL As in 1990 when Iraq invaded fellow OPEC-member Kuwait, Saudi Arabia has the vast majority of spare global capacity and could once again see its control over the world oil market strengthened. In August 1990, when OPEC last suspended quotas, Saudi Arabia lifted output by more than two million bpd to 7.7 million. This time Saudi could hike output by another two million to 10 million, putting the Arab kingdom in sole control of almost a quarter of global oil exports. "This could reinforce the strategic value of Saudi Arabia to the United States," said Alkadiri. "At the same time as increasing production significantly it will stand to gain financially from $37 oil," he added. Independent observers say output has already advanced by a million bpd over its quota of eight million, in anticipation of war, and Riyadh has already seen an unexpected windfall from an Iraq-fuelled price spike. Drollas estimated that Saudi oil revenues will rise by $4.5 billion this year to $60.4 billion. The 1990 agreement was explicitly temporary, but the world's oil kingpin never looked back. Its output has not fallen below seven million since. "You can't argue with capacity. If you have it, you can use it," said an OPEC official. Alkadiri said the analogy with the previous Gulf crisis should not be taken too far, however. In 1990, both Iraqi and Kuwaiti exports were halted and retreating Iraqi troops torched Kuwait's oilfields. This time, many analysts expect only Iraqi flows to stop, possibly for a shorter period. "A lot depends on the spillover from the Iraq war and how long it lasts," Alkadiri said. "Longer-term issues of overcapacity will come back to haunt OPEC eventually."