Bush, Saudi Arabia, Oil and the Economy

During his trip to the Middle East, President Bush on Tuesday (January 15) tried to get Saudi Arabia to open the oil spigot some more.

The Washington Times reported:

"I would like for them to realize that high energy prices affect the economies of consuming nations," Mr. Bush said earlier in the day of the Saudis. "If these economies weaken, those economies will eventually be buying fewer barrels of oil."

Saudi Arabia is one of five founding members of the 14-nation Organization of Petroleum Exporting Countries (OPEC). The price of oil hit $100 a barrel last week, raising concerns that the cost of importing 20 million barrels a day in the U.S. may add to the likelihood of a recession. Yesterday, oil fell $2.30 to $91.90 a barrel.

Speaking to reporters at the Saudi Royal Palace guesthouse, Mr. Bush said that "there’s not a lot of excess capacity in the market place" and that "demand has outstripped supply."

Mr. Bush’s statements drew a quick response from Oil Minister Ali al-Naimi. "Some people mistakenly think that the U.S.-Saudi petroleum equation is determined by how much oil the United States imports from Saudi Arabia," Mr. al-Naimi said, during a press conference at the hotel housing the White House press corps. "In fact, these are purely commercial transactions and are a function of market fundamentals rather than policy directives," the minister said. "We will raise production when the market justifies it. This is our policy."

He defended the withholding of about 2 million barrels a day for the building of an emergency oil reserve. When asked about the impact of a possible U.S. recession, Mr. al-Naimi said, "No one will look with pleasure on a recession in the U.S." Asked whether gas prices would ever dip below $2 a gallon for U.S. drivers again, Mr. al-Naimi said, "If I knew the answer to that question, I would be in Las Vegas rather than here."


This exchange illustrates a key problem with the oil market, that is, government control. When referencing OPEC, we are talking about government-controlled oil. Political leaders are deciding levels of oil production. Unfortunately, even in oil producing nations, politicians – elected or unelected – are not so hot at gauging markets. President Bush can push and cajole, but the reality is that OPEC nations will produce oil at a level meant to maximize their revenues. As President Bush correctly warned, the risk at current prices – or perhaps higher future prices – is that these energy costs will aid in slowing economies, and perhaps even pushing them into recession.

That, in fact, is what’s happening in the U.S. right now. High energy prices – while far from the full tale – is part of the economic story. But, of course, it’s not all OPEC’s fault. U.S. policymakers must take blame as well. For example, the weak dollar has naturally pushed up the price of oil, while governmental restrictions on U.S. energy exploration, development and production must be lifted.

In addition, it must be recognized that part of the oil price premium is still tied to political uncertainties, including war and terrorism, in the Middle East.

Energy markets are not analogous to gambling in Las Vegas. Instead, they should be about government getting out of the way, and letting consumers and producers respond to price and profit signals in the marketplace.