Saudi's pumping more oil - no panacea for higher prices

Will news that Saudi Arabia is about to increase oil production help us at the pumps?

Firstly, there is no shortage of oil for immediate delivery although the price is being driven higher by consumers and speculators concerned about the long-term price of oil and the ability of producer Nations to supply demand over the next decade

What is odd about the latest announcement is that Saudi officials and other OPEC Nations have insisted for months that pumping more oil was not the answer. Instead, they have blamed higher prices on a weakening US dollar and the increasing involvement of speculative hedge funds in the commodities market. The Saudi Oil Minister recently said that soaring prices were not justified by the fundamentals of supply and demand.

One of the biggest problems facing consumers of refined petroleum products is that there remains a global shortage of refining capacity, not a shortage of oil to refine; at least not at the moment.

Most of Saudi Arabia's excess capacity consists of heavy and high-sulphur crude, which is harder to refine into products like petrol and consequently is in much less demand. Refiners not only would have to go to more trouble to refine the heavier crude, they also would have to be willing to spend money to put large amounts of the oil in storage at the risk that the price of oil falls before they are able to refine it. After all, that is what the Saudi’s are trying to do – get the price lower.

This announcement by the Saudi’s is most unlikely to be the panacea that most are looking for….

I think that one of the longer-term issues is that as demand for refined petroleum products drops in response to high prices at the pump, refiners margins will decrease (what they make from refining oil into petroleum products), this in turn will only exaggerate the lack of global refining capacity as the economics simply won’t stack up for investment in new refining capacity. The US has not built one new refinery in 30 years….

As a footnote; I’ve noticed a few posts recently about whether the fuel price has curtailed travel plans for some. Fuel is only one part of travel costs, but I also believe that the price is ‘elastic’ as it goes up we will see less recreational travel. Bear in mind that other cost imposts, like rising interest rates, are also impacting house-hold budgets. This will eventually feed into lower resale prices for recreational 4WD vehicles and caravans – a hidden cost that should not be overlooked.