Saudi Arabia - Energy

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Item of Interest
October 18, 2008

Energy, Recession and Responsibility

Editor's Note:

On October 6, 2008 OPEC called an "Extraordinary" meeting of the 13 member crude oil producers' cartel for November 18 "amid growing unease over.. ..the global financial crisis, the world economic situation and the impacts on the oil market," according to an OPEC statement. On Thursday [Oct 16] OPEC Secretary General Abdalla Salem El-Badri announced the "Extraordinary" meeting was being moved up to next Friday [Oct 24] as the global financial crisis takes an increasingly deep bite out of world energy demand. By then crude oil prices were tumbling below $70, after topping out at almost $150 just a few months ago.

In an update on global and local economic conditions released Thursday [and provided to SUSRIS readers] Jadwa Investment's Chief Economist Brad Bourland noted the deteriorating outlook for Saudi Arabia's economy due to the drop in oil prices. His assessment continued, "We expect OPEC to cut production in order to defend prices.. ..and indications are that Saudi Arabia has taken off the market much of the supply increase it introduced in the summer. Lower oil production and prices will dramatically reduce the budget and current account balances, though in both cases we still expect relatively comfortable surpluses. Lower oil production will cut our forecast for real GDP growth."

In an editorial today the Arab News -- the first English daily newspaper in Saudi Arabia -- explored the questions connected with the global financial crisis, the world energy markets, and the relationship between responsible conduct among energy producers and economic stability. We provide that editorial here for your consideration along with links to reports on the current situation.

Editorial: Oil price and recession fears
Arab News
18 October 2008

To the great consternation of many in the world, the price of oil rocketed. Now it is tumbling amid fears of a recession ahead, although few take much notice. On Thursday it fell to below $70 a barrel, a 14-month low.

The fears of global recession are no figment of stock market traders� panicky imaginations. Recession can be seen in the latest figures from the US where home building is at a 17-year low and retail sales, down 1.2 percent in August, dropped a further one percent last month. The picture is as grim elsewhere in the industrialized world: Ireland, feted in the 1990s as Europe�s Celtic Tiger, has seen its overall economy contract by one percent; in the UK, property sales last month were at their lowest since 1978 (in terms of number sold). Certain sectors are worse hit than others: American, Japanese and Korean car manufacturers report sales down by as much as 37 percent.

Is there a link between high oil prices and recession? Is there a link between high oil prices and the present financial crisis?

In one sense there are two obvious ones. They are called greed and irresponsibility � greed by irresponsible speculators who forced up prices on the international oil market regardless of the consequences and greed by irresponsible financiers and bankers who played the market like a casino using other people�s money and who in doing so brought on the credit crunch and the wider financial crisis.

There is, however, a real economic link between high oil prices and recession. The one has helped triggered the other -- as Saudi Arabia and one or two other producers warned might happen on more than one occasion over the summer when the oil price rocketed. It has been seen in airlines going bust or airline staff being laid off because of high aviation fuel prices; in rising prices, particularly of food, because of rising transport costs; in other businesses forced to either lay off staff or close their doors because of uncontrollable energy costs; in people canceling vacations and cutting back on spending because of inflation triggered, again by soaring energy prices.

In that sense, although there is no direct link between high oil prices and the initial financial meltdown, which was triggered by the credit crunch and the subprime crisis, there is an indirect one. Behind the actual cause was an accompanying realization that the world was on the edge of recession, itself fueled by excessively high-energy costs. It was fears of this that, last week, undid the early euphoria at the European trillion-dollar response to the crisis and continued the chaos.

For this, some oil producers have to accept a degree of responsibility. Last month, when OPEC, much against Saudi Arabia�s advice, voted to cut production in an effort to keep prices high, they acted � like the speculators and the bankers � from self-interest. They could not see, or would not see, the damage that excessively high oil prices was doing, not just to the global economy but to long-term demand as well, with high prices pushing consumers to look to alternative technologies.

Ironically, lower oil prices may help the world avoid recession. We must hope so. It is in everyone�s interests, consumers as well as producers. There has to be a balance between a good price for producers and one the consumers, including those in poorer countries, can afford. But the issue is now about much more than producers not pricing themselves out of the market. It is about responsibility in an interconnected global economy. Saudi Arabia and other Gulf producers have long advocated it. Others need to heed that call.

Source: Arab News

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