ImageMay 1, 2011 marks the death of Osama Bin Laden and hopefully the continued demise of Al-Qaeda and its attacks on innocent Muslims and Americans alike. Since oil is one of the major resources of the Arab world, it is not surprising that oil did not escape the attention of Bin Laden, who was born to a wealthy Saudi family. In 1996 and later, Bin Laden focused on Middle East oil to motivate his followers, calling upon them to stop the giant theft of the resources of Muslims. In his “Message to Americans” in October 2002, Bin Laden said “You steal our wealth and oil at paltry prices because of your international influence and military threats…” Oil was fourth on Bin Laden’s long list of why America should be attacked. In December 2004, he cited oil as the U.S. motivation in Iraq and called on the faithful to take arms, citing as a motivating cry that the price of oil should really be at least $100 a barrel. 

 

Bin Laden’s pronouncements were followed by attempted attacks on Saudi oil installations, including one deadly event at Yanbu, Saudi Arabia on – ironically – May 1, 2004. The attacks, which resulted in the deaths of a few foreign oil workers, became linked over time to the so-called “terror premium” which began to support a rise in the price of oil.

Bin Laden’s death is a reminder that geopolitical trends and events define the international price of crude oil. Washington politicians would be wise to avoid pretending otherwise in the clamor to “solve” high U.S. gasoline prices. The Saudi government surely takes into account its own public attitudes in setting the price of oil, not the American ones.

U.S. President Obama told Detroit television listeners today that he was telling oil producers such as Saudi Arabia that “it’s not going to be good for them if our economy is hobbled because of high oil prices.” That is certainly true. The drop in U.S. oil demand, amid recession and high gasoline prices, was one key reason oil prices started collapsing in the summer of 2008.

But Saudi leaders have other fish to fry these days, including paying for the kingdom’s new $36 billion handout to its citizens and increased spending designed to ease social pressures in the kingdom.  A new estimate by the Institute of International Finance suggests that Saudi Arabia will need at least $110 oil by 2015 to balance its budget, up from $88 a barrel this year.

Moreover, while President Obama needs to worry about rising gasoline prices ahead of the U.S. summer driving season, King Abdullah of Saudi Arabia needs to make sure Saudi oil is used to ensure Saudis have sufficient electricity for air conditioning as seasonal temperatures rise in the kingdom.

The customary seasonal rise in domestic demand could be one explanation for Saudi reluctance to push out extra oil onto Western buyers. Up until the confusing announcements about Saudi production caught the eye of the White House and almost everyone else who cares about the price of oil, most estimates put Saudi oil production at around 9.3 million b/d to 9.6 million b/d in late February-early March. Assuming summer demand for extra crude oil to burn for electricity generation is the same or a little larger than last year, Saudi Arabia needs to make sure it has an incremental 900,000 b/d to 1.2 million b/d of oil available for June, July and August. If the kingdom holds its production unchanged from late February levels, it would mean that Saudi production would need to top 10.2 million b/d to 10.8 million b/d to meet both higher international exports and rising domestic air conditioning needs. Those are big numbers when you consider many insiders say that the kingdom would have difficulty sustaining production above 11 million b/d for a long period of time.

Taken in context, it would not be surprising to imagine that the Saudi government would choose summer indoor cooling for its population over lower gasoline prices for Americans. In a tricky world where governments are trying to placate their citizens to ease the risk of large public protests, summer brownouts would be something significant to avoid. And that is a more sensible explanation of the constraints now facing Riyadh than the ones being proposed by pundits and Saudi officials alike.