BY JOHN D. McKiNNON,STEPHEN POWERAND NEIL KING JR.
The Saudi king rebuffed U.S.President George W. Bush's request for higher oil production, in the lat-st sign of how America's leader sare struggling to combat soaring energy costs that have become a major election-year issue.
The exchange between King Abdullah and Mr.Bush came on Friday, the same day crude-oil futures hit another record, up $2.17 per barrel to close at $126.29 on the New York Mercantile Exchange. With U.S. voters see thing over has prices, Congress is considering a grab bag ofideas: Withholding arms sales to Saudi Arabia until it ramps up production by one million barrels per day;opening up the Organization of Petroleum Exporting Countries to anti-collusion lawsuits in the U.S.; and tightening regulation of oil trading.
The Saudis' cool response to the volley of American pleas and threats underscores that the U.S.,which relies on imports for about 60% of its 20-million-barrel-a-dayoil habit, has no near-term prospect of managing prices down. Buteven as the administration pressedits request for more Saudi supplies,U.S. officials conceded the currentlevel of Saudi production isn't the prime factor driving today's oilspike.
"There is something going on in this oil market that is more complicated than just turning on the spigot," White House national security adviser Stephen Hadley told reporters, recounting the president's afternoon meetings with Saudi officials at King Abdullah's farm.
Saudi officials told American officials that they believe prices aresoaring due to a host of factors that they and independent analyst shave been citing for several yearsnow. Those include the falling value of the U.S. dollar; increased speculation and hedging in financial markets; geopolitical uncertainty in the Gulf region and otherproducing areas; refining capacity that often isn't well-suited for current production; and pessimism insome quarters about the long-term outlook for global oil supplies.
In recent months, oil priceshave been soaring despite softening demand in most industrialized countries and signs of abundantsupplies in many markets. The Iranians are now holding around 25million barrels or about twice what the U.S. imports daily-of less-desirable heavy crude in offshore tankers in the Persian Gulf, and crude supplies inthe U.S. have remained well within five-year norms.
Traders and forecasters cite a slew of disturbing long-range trends to explain why prices will remain on an upward track.Goldman Sachs, in a report Friday, predictedthat U.S. benchmark crude would top $140 asearly as July, and stay above thatlevel for the rest of the year. The bank forecast that crude would average $148 a barrel next year, twicethe 2007 average.
Analysts say that long-term supply constraints, ranging from slumping Russian production tothe uncertain prospects for growthin nonconventional fuels like ethanol, point to increased tightness in the market as the year goes on.
Saudi oil minister Ali al-Naimisaid he told the Americans that Saudi Arabia is doing everything needed to keep world markets well-supplied. The Saudis saidthey are selling 300,000 more barrels per day in June, to a total of 9.45 million. That is a response to higher orders from their customers, mostly from the U.S., Mr. al-Naimi said."If you want to move moreoil, you need a buyer," hesaid.
One concern that has prompted traders to bid upoil prices is Saudi Arabia's long-term proauction capacity:Some analysts believe the kingdom's best fields could hit a production peak in the years ahead.
Meanwhile, Saudi Arabia is investing tens of billions of dollars tobring fresh supplies onstream this year and next, and may prove to be the only significant new provider of crude for some time to come.This summer, the Saudis plan to open the huge Khursaniyah project,which will deliver an extra 500,000 barrels a day. Work is also underway on a much bigger project at Khurais, which the Saudis hope willdeliver 1.2 million barrels a day,making it one of the largest fieldsin the world. That field presentstechnical challenges, however.
Though the oil market's problems are complex and deeply entrenched, Mr. Bush likely can't escape some blame for the current price spikes. The U.S. invasion of Iraq reduced that country's oil production for several years, and added to the geopolitical jitters inthe Middle East that have also helped support prices. The dollar'sslide also drives up prices because oil sales are denominated in dollars and producers need more of them to make the same profit. The weakened currency stems partly from the rise in U.S. government debt inrecent years.
Mr. Bush's visit to Saudi Arabia came as Democrats in Washington ratcheted up pressure on him to take a tougher line on the kingdom,and just days after overwhelming majorities of Republicans in the House of Representatives and Senate voted with Democrats-who control both bodies-to force the administration to stop acquiring oil tcstore in an emergency stockpile. They hope removing that demand will tamp down prices.
The White House hassaid Mr. Bush won't veto that legislation. On Friday,the Energy Departmentsaid it wouldn't enter into new contracts to continuethe stockpile's build-up.
This week, the House is expected to vote on more legislation that could embarrass Mr. Bush, including a so-called "NOPEC" bill that would allow the Justice Department to take legal action against OPEC-controlled entities. Senate Democrats, meanwhile, are push-ing the legislation to block pending arms deals with Saudi Arabia until production increases by one million barrels per day.
The Democratic measures facean almost certain veto from Mr.Bush should they be approved by Congress.
Meanwhile, Mr. Bush is taking fire from the U.S. oil industry. Exxon Mobil Corp. Chairman and Chief Executive Officer Rex Tillerson said in an interview last week that it is "astonishing" and "terribly upside down" that a U.S. president would lobby a foreign government to boost production even as much of the U.S. remains off limits to domestic drilling.
In response to Mr. Tillerson's remarks, a White House spokesman said the administration has worked with local and state officials in certain areas with oil reserves to "expand domestic exploration in an environmentally sensitive way."
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