The Group of Seven finance ministers asked the world’s largest energy-producing nations to increase the supply of oil. The ministers released a call to that effect:
We stand ready to call upon the International Energy Agency to take appropriate action to ensure that the market is fully and timely supplied. The current rise in oil prices reflects geopolitical concerns and certain supply disruptions. We encourage oil-producing countries to increase their output to meet demand.
What the G7 finance ministers did not say is what incentives there are for these nations, led by Saudi Arabia, to do so. The increase in production may help the nations of the developed world, but there is no reason to believe it benefits any other group of countries.
The Saudis, among others, only need to look at the price of crude to raise objections to the request. WTI crude trades at about $96. That is high compared to the price over the past several months, but still well below its $110 level in February. Despite worries about higher oil prices several months ago, there is not much evidence world gross domestic product was badly undermined by it.
The G7 request is based largely on concerns that the eruption of conflict in the Middle East over the Iran oil embargo will cause a spike in crude prices. Despite ongoing anxiety, there has been no conflict, even though Israel seems ready to battle with Iran. At this point, the situation with Iran is an uneasy standoff.
Another claim the oil-producing nations could make to counter the G7 request is that most of the countries in the group have strategic oil reserves. President Obama released crude from the U.S. Strategic Petroleum Reserve in June 2011, as did other members of the International Energy Agency. Why not do so again?
The Saudis will fairly ask, if they have not already, why the G7 does not take into account the kingdom’s own finances. Saudi Arabia, like any other large supplier of oil, balances price against output. Presumably, leaders of that country are astute enough to believe the current balance is in their own best financial interests. Why the Saudis should go against those interests is hard to understand.
The G7 financial ministers cannot prove that the current price of oil and their own abilities to increase supply make a reasonable basis on which to ask producers to ship more crude.
Douglas A. McIntyre
Top Gaining Stocks
Top Losing Stocks