Saudis' offer to raise oil output makes little impact on market

WASHINGTON -- Saudi Arabia sought to calm turbulent oil markets Wednesday by offering to boost production, but after an initial drop in prices the cost of oil rose again by day's end.

The Saudis' failed attempt to jawbone prices lower suggests to many industry specialists that current conditions -- production at near capacity, surging demand and fears of terrorism -- are curtailing the long-established power of the kingdom in international markets.

"In a sense, it's a perfect storm," said Fareed Mohamedi, chief economist for PFC Energy, a Washington, D.C.-based consulting firm.

"Many factors have just all come together and pushed the Saudi ability to the wall."

The U.S. Federal Reserve on Tuesday blamed the run-up in oil prices for the recent sharp slowdown in the economy.

Democratic presidential candidate John Kerry has raised concern that U.S. dependence on oil from Saudi Arabia, the world's largest exporter, leaves the United States vulnerable.

Adel Jubeir, foreign affairs adviser to the Saudi crown prince, said in a conference call with reporters that Wednesday's announcement was not intended to influence the political campaign.

"Our policy is to maintain prices at a moderate level," he said.

Saudi officials said the pledge of increased production was motivated by concerns that oil prices were too high and could depress the world economy and lead to a decline in demand.

White House spokesman Trent Duffy would not discuss the Saudi announcement, saying only that the administration works with oil-producing countries to ensure adequate oil supplies.

The Saudis said they could immediately produce an additional 1.3 million barrels a day of crude oil beyond the 9.3 million barrels currently pumped, if needed. The government said that -- at least for now -- it would not expand production because its customers had not requested more oil.

As word of an imminent Saudi announcement reached traders on the New York Mercantile Exchange Wednesday morning, the price of benchmark U.S. crude oil for September delivery dropped by more than $1 per barrel. Traders said they originally thought there would be a flood of new oil on the market.

But prices later rose as traders dissected the Saudi statement and questioned how much capacity actually exists to produce the type of crude oil most easily processed into gasoline. The closing price of a 42-gallon barrel of oil was up 28 cents from Tuesday, to $44.80 per barrel, a near record. Adjusted for inflation, prices are below peaks in 1990.

Some analysts said they believed the Saudis could produce an additional 1.3 million barrels a day, while others were doubtful. But analysts in both camps said much of the additional oil likely would be a variety that is more difficult to convert to gasoline because of limited refinery capacity.

Meanwhile, other events are driving prices up. Demand has increased, mostly in China and the United States. The Paris-based International Energy Agency, which advises the United States and 25 other countries, increased its projections for oil demand for the rest of this year and next year.

The agency said it had underestimated oil use for years.

The report said the current prices were a concern and are causing "economic damage." Traders are fearful of supply disruptions resulting from terrorism or instability in several key oil-producing countries.

Moreover, as the Saudis reach their capacity, traders become more nervous because even less spare oil would be available in an emergency.

The rising price of crude oil in recent months has also pushed up the price of gasoline. Although retail prices have moderated recently, analysts expect prices to start rising again. The national per-gallon average price for regular gas was $1.865 Wednesday, according to a survey by a contractor for the AAA automobile club. That is down several cents from a month ago but up from a year ago.