Saudi Arabia announced at its meeting today that it plans to increase production by 200,000 barrels per day in July (as yesterday’s blog anticipated). This amount is only a .2% increase in global supply and is completely erased by recent events in Nigeria, a strike and a pipeline explosion, if they persist. Saudi Arabia also plans to increase capacity by over one million barrels per day by the end of 2009, but this amount would struggle to offset decreases in production in Mexico, Norway, and the UK or to provide for new demand in China and other emerging economies. In fact, Saudia Arabia will produce less oil in July than it did in 2005 when the Kingdom consumed 300,000 fewer barrels per day domestically — leading to an increasing view that the depletion facing non-OPEC producers may be damaging the ability of our world’s biggest producer to significantly increase supply.
So, just like the Saudi increase of 300,000 barrels per day in May, the smaller summer increase does not appear to have the strength to stop a rising trend for oil prices. The most effective way to control prices is for us to ramp up efficiency and substitution as rapidly as possible. After the June oil production numbers are published, I plan to put together a comprehensive view on the oil market with some educated guesses on the direction of prices. My current inclination is that if all Saudi Arabia (the world’s swing producer) can offer the global oil market is 200,000 barrels per day at an unprecedented meeting of producer and consumer countries, then the oil prices of today may look like a great deal in a few months.