Saudis gear up for oil price war

As war in the Middle East threatens to throw the international oil market into uncertainty, the member nations of Opec, led by Saudi Arabia, are quietly gearing up for a price war intended to boost their own market share at the expense of their competitors.

Such a squeeze would set back US efforts to lessen its dependence on Middle Eastern oil and seek alternative energy sources elsewhere in the world.

At a time when political turmoil in Venezuela is already disrupting a fifth of the US oil supply, the Americans could find themselves even more closely tied to Saudi Arabia, a country increasingly criticised in Washington for its ambiguous attitude to terrorism and its reluctance to join in the campaign against Iraq. Fifteen of the 19 hijackers in the September 2001 attacks were Saudis.

According to a senior Opec source who attended the group's latest meeting in Vienna last week, the organisation has tacitly given a green light to its members to continue producing beyond their allotted quotas in an effort to push down world oil prices and put the squeeze on competing producers, notably Russia and the rest of the former Soviet Union.

If, as some analysts believe, the Saudis intend to push the price of oil down from its current $28 per barrel to $15 per barrel or less, it could demolish the economic feasibility of pumping oil in places like Alaska or Siberia. It would also make it hard for America's new best friends, in west Africa and elsewhere, to compete.

Officially, Opec pledged to cut output and impose greater discipline on its members so they do not overrun their quotas. Unofficially, analysts and Opec sources said, Saudi Arabia may lead the organisation into a bout of "capacity cleansing" to drive non- Opec oil out of the market.

Several factors could have influenced the Saudi position. In their eagerness to diversify America's energy imports, some US officials have expressed a desire to see Opec demolished altogether.

According to some analysts, the Saudis may feel the need to prove that they remain the ultimate controllers of world oil prices at a time when American hawks are dreaming of taking over not only the Iraqi oilfields, but possibly those in Iran too. But a war will create tremendous short-term opportunities for the Saudis, especially if supplies from other parts of the Middle East are interrupted as a result of the fighting.

"In the short term the West will be more dependent on Saudi Arabia, which will probably wage a price war so production in places like the North Sea and the United States dries up," suggested John Mitchell, a former BP executive now with the Royal Institute of International Affairs.

US politicians of all stripes are growing increasingly convinced that the best way to cut the Saudis out of the energy equation is to turn away from oil. The energy task force led by Vice President Dick Cheney, has looked in particular at expanding the market share of natural gas and nuclear power. Others, including the Democratic presidential hopeful John Kerry, have suggested massive investment in new energy technologies, such as solar-photovoltaic and hydrogen power.

Not all analysts believe that the Saudis would necessarily be able to pull off a price war successfully. A similar strategy was tried in 1986, but the price fell far lower than the Saudi government wanted, leading to major domestic budgetary problems and political pressure on an already fragile ruling autocracy. "They can control the direction of the oil price, but they can't fine-tune," said Mark Bernstein, a senior energy analyst with the Rand Corporation.

"There is also a question of whether a lower price will enable them to sell enough extra oil to meet their revenue requirements. It's not at all clear that they can."