Saudi Arabia on the brink of turning on the taps

The world's largest oil-producer is apparently in talks to up production in an effort to stabilise prices. Just in the nick of time for the Coalition...

by Emma Haslett
Last Updated: 06 Nov 2012

With oil prices creeping steadily higher, it looks like Saudi Arabia has recognised that we’re nearing crisis point. The leader of the Opec oil cartel is apparently in talks to boost supplies, thus driving down prices. It’s perfect timing – prices hit $120 a barrel yesterday after violence in Libya caused its production to drop. But Saudi Arabia, the world’s largest oil-producing nation, seems reasonably sure that it can pick up the slack left by Libya: one official told the FT that if it needs to, ‘then it will happen, there’s no problem at all’. Let’s hope it’s enough to placate George Osborne – given the effect oil prices can have on inflation, chances are that as they’ve gone up, the Chancellor has been beginning to shift uncomfortably in his seat…

No one’s quite sure how much the violence has affected oil production in Libya. One suggestion is that it’s dropped from about 1.6m barrels a day to as low as 400,000. The Saudis, though, seem unruffled: according to one source, the kingdom has about 4m barrels of spare capacity – more than double Libya’s entire output. And what’s more, traders believe Saudi Arabia has the facilities to immediately start producing 1m extra barrels a day – which means that once the taps are turned on, it’ll only be 10 days before the first tankers arrive in Europe, presumably to cheers of gratitude from increasingly penniless drivers.

So if the Saudis do step up production, it can at least begin to stabilise the volatile market – just in time for the Government, which has presumably watched the rising prices with increasing anxiety. The concern would be that rising oil prices would have the sort of effect on inflation that the Government would have no control over. Raising interest rates, which is a traditional solution to burgeoning inflation, might therefore have little effect, leaving the Government, to all intents and purposes, pretty helpless.

Prices stabilised a bit this morning at about $110 a barrel (although that's still $10 up on the week), but a volatile oil price looks set to be the order of the day for the forseeable future.

Compared to Saudi, Libya’s role in global oil-production is relatively small. But the unrest there does act as a sign post for what may be to come in the region. So while you might think £90 is a lot for a tank of petrol, there’s a chance that by this time next year, that could be positively cheap…

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