President Bush is locked in talks with the Saudi government asking them to increase oil production, which would then lower oil prices in the US domestic market.
He was told, in no uncertain terms, that there wasn’t sufficient demand in the world for the Saudis to raise its oil production. This comes on the back of oil costing $127 per barrel which is leading to Americans paying ever increasing prices at the pump. This, and the knock-on effect, is having a sharp impact on the American economy that some say should be growing much stronger than it actually is.
Saudi Arabia Friday rebuffed President Bush’s request to immediately pump more oil to lower record prices, saying it does not see enough demand to increase production.
With the weakness of the US dollar still being played out on the world currency markets many economists cannot see an end in sight, they are saying that it is a possibility that a barrel of crude will reach $200 per barrel causing the US economy to fall ever deeper in recession. This in turn would not help John McCain in his push for the White House – I would presume that many Democrats are willing the Saudis to keep saying no to the increase so helping either Hillary Clinton or Barack Obama in their campaigns.
The greater impact of this would be that, as many would say, if America sneezes the rest of the world catches a cold – this could be the case if the US falls into deep recession the rest of the world would implicitly follow.
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3 users commented in " There Isn’t Enough Demand "
Follow-up comment rss or Leave a TrackbackThe price of oil is determined in principle in a classic open market. Seller makes an offer – buyer accepts offer. Price is set. Obviously there are variations in respect of quality but no more than a few dollars. The classical economic model is at work here. At the intersection of the supply and the demand curves we get the price. Demand is affected by the collective needs of the world’s economies – the West and (increasingly) the rapidly growing economies of India and China. Supply (on the margin) is very strongly determined by the OPEC producing cartel. They decide what their production will be over any period (obviously within the limits of what is technically possible). If they restrict production somewhat the price will rise. If they release more production the price will fall. So the Saudis and other OPEC members are not at present restricting supply because there is no demand (whatever they may say). They could ensure that the price of crude fell substantially tomorrow by cranking up supply – but they judge that it is not in their interests to do so.
Non OPEC producers generally produce the maximum that they can and for the Multinational Oil companies like Exxon, BP and Shell it’s bonanza time. They don’t have to do much – just let the $$$$ roll in!
I should add that much of the above is in a context of “perceptions” and “forecasts” (i.e. what speculators and traders perceive to be happening and expect to happen). There is rarely an actual shortage or surplus in the short term. The price changes in line with what people expect to happen.
Then why is Bush asking for Saudis’ to increase production?
I think all this open market economics is a bunch of bunk.
Follow the money:
Who benefits from high oil prices?
1. Multinational oil companies and their hugely over-rewarded top management.
2. Producing countries whose production far exceeds their local demand (mainly in OPEC). Find me an OPEC producer that does not have ruling families living in grandiose palaces characterised by conspicuous consumption.
The above laugh all the way to the bank. And there is clearly mutual advantage (if not an actual conspiracy) for the two beneficiaries to “work together” to keep prices high.
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