American Political And Economic Chautauqua: WikiLeaks: Saudis often warned U.S. about oil speculators

By Kevin G. Hall | McClatchy Newspapers

WASHINGTON — When oil prices hit a record $147 a barrel in July 2008, the Bush administration leaned on Saudi Arabia to pump more crude in hopes that a flood of new crude would drive the price down. The Saudis complied, but not before warning that oil already was plentiful and that Wall Street speculation, not a shortage of oil, was driving up prices.

Saudi Oil Minister Ali al Naimi even told U.S. Ambassador Ford Fraker that the kingdom would have difficulty finding customers for the additional crude, according to an account laid out in a confidential State Department cable dated Sept. 28, 2008,

"Saudi Arabia can't just put crude out on the market," the cable quotes Naimi as saying. Instead, Naimi suggested, "speculators bore significant responsibility for the sharp increase in oil prices in the last few years," according to the cable.

What role Wall Street investors play in the high cost of oil is a hotly debated topic in Washington. Despite weak demand, the price of a barrel of crude oil surged more than 25 percent in the past year, reaching a peak of $113 May 2 before falling back to a range of $95 to $100 a barrel.

The Obama administration, the Bush administration before it and Congress have been slow to take steps to rein in speculators. On Tuesday, the Commodity Futures Trading Commission, a U.S. regulatory agency, charged a group of financial firms with manipulating the price of oil in 2008. But the commission hasn't enacted a proposal to limit the percentage of oil contracts a financial company can hold, while Congress remains focused primarily on big oil companies, threatening in hearings last week to eliminate their tax breaks because of the $38 billion in first-quarter profits the top six U.S. companies earned.

The Saudis, however, have struck a steady theme for years that something should be done to curb the influence of banks and hedge funds that are speculating on the price of oil, according to diplomatic cables made available to McClatchy by the WikiLeaks website.

The cables show that the subject of speculation has been raised in working group meetings between U.S. and Saudi officials, in one-on-one meetings with American diplomats and at least once with President George W. Bush himself.

The Saudi concerns about speculation have a particular sheen of credibility. Saudi Arabia is the world's largest exporter of oil, serving dozens of clients in addition to the United States. As such, it carefully tracks the trends that drive oil prices, which send it billions of additional dollars with every increase.

But in the cables, Saudi officials explain that they have two primary concerns about artificially high crude prices: that they'll dampen the long-term demand for oil and that the wide price swings typical of commodity speculation make it difficult for them to plan future oil field development. After that $147 a barrel peak in 2008, for example, prices plunged to $33 a barrel as the global financial crisis rocked the world. That was a stunning change in less than half a year.

One cable recounts how Dr. Majid al Moneef, Saudi Arabia's OPEC governor, explained what he thought was the full impact of speculation to U.S. Rep. Alan Grayson, D-Fla., who in July 2009 was in Saudi Arabia for the first time.

According to the cable, Moneef said Saudi Arabia suspected that "speculation represented approximately $40 of the overall oil price when it was at its height."

Asked how to curb such speculation, Moneef suggested "improving transparency" — a reference to the fact that most oil trading is conducted outside regulated markets — and better communication among the world's commodity markets so that oil speculators can't hide the full extent of their trading positions.

Moneef also suggested that the U.S. consider "position limits" — restrictions on how much of the oil market a company can control — something the CFTC is considering. But the proposal to prevent any single trader from accumulating more than 10 percent of the oil contracts being traded hasn't received final approval, and the CFTC also has yet to define what it considers excessive speculation.

Saudi concerns also came up during a May 2008 meeting in Riyadh, the Saudi capital, between U.S. officials and Prince Abdulazziz bin Salman bin Abdulaziz al Saud, the assistant petroleum minister.

Prince Abdulazziz was "extremely worried" that high prices would destroy the demand for oil, according to the May 7, 2008, account of his meeting with embassy officials.

"Aramco is trying to sell more, but frankly there are no buyers," the cable quoted him as saying, referring to the Saudi state oil company. "We are discounting crudes."

Another confidential document from the embassy in Riyadh, dated Feb. 14, 2007, indicates that Saudi officials had concluded years ago that speculation played at least as big a role in setting oil prices as traditional issues of supply and demand did.

Recounting the presentation by Yasser Mufti, a planner for Aramco, at a conference of U.S. and Saudi officials, the cable said: "The Saudi analysis indicated a link between higher oil prices and the influx of investor funds into the oil markets."

Indeed, the cable noted, "As the oil futures markets play an increasingly large role in setting world oil prices, (Mufti) remarked his team was now obtaining better insights into prospective oil prices from banks than from those working in the real oil sector, such as refiners."

Another document, from Sept. 2, 2009, offers an eerily accurate prediction of today's high prices, made by Sadad al Husseini, Aramco's former executive vice president.

"In his view, the bearish energy analysts arguing that the oil price shocks of last summer are not likely to be repeated anytime soon are making inaccurate assumptions," the cable said, warning that the former Aramco executive saw political uncertainty and a perception of tight supplies as fuel for speculators.

The cable said that "al Husseini predicted that another oil price shock would likely hit sometime in the next year or two."

A McClatchy investigation earlier this month showed the extent to which financial institutions now influence the price of oil. Until recently, end users of oil — such as airlines, refineries and other consumer of fuel — accounted for about 70 percent of oil trading as they tried to hedge against price fluctuations.

Today, however, speculators who'll never take possession of a barrel of oil account for that 70 percent of oil futures trading, and the volume of speculative trading has grown fivefold.

That's why the Air Transport Association, in a filing March 28 to the CFTC, called for aggressive curbs on speculators. The association complained of rapidly climbing jet fuel prices, which have outpaced the rapid climb in crude prices and have reached their highest point since September 2008, right before the near-collapse of the U.S. economy.

"At the same time, according to data recently released by the commission, speculators have increased their positions in energy markets by 64 percent compared to June 2008, bringing speculation to the highest level on record," wrote David Berg, the airline group's chief lawyer.

The WikiLeaks documents also shed light on other aspects of Saudi Arabia's oil industry.

One document said that Saudi Arabia has boosted its excess capacity — the difference between the amount of oil it could produce and the amount it pumps for its clients — from 2 million barrels per day to 4 million, a margin that offers assurance that there'll be little disruption to oil supplies from political unrest in places such as Libya, where oil production has ground to a halt.

Another quotes the chief economist of Saudi investment bank Jadwa Investment as estimating in June 2008, shortly before oil prices peaked, that the kingdom earned more than $1 billion a day from oil. Another quotes Aramco's treasurer as saying the state oil company had its own Europe-based global investment fund that in April 2008 had assets worth $60 billion.

A fourth document quotes the Saudi assistant petroleum minister as expressing concern to Ambassador James Smith that Saudis could be "greened" out of the U.S. market. The minister noted in 2009 that the United States for the first time had consumed more ethanol than it did Saudi oil.

READ THE CABLES

Cable: Saudi OPEC governor's views on oil business

Cable: Former Saudi Aramco exec bullish on oil prices

Cable: U.S., Saudis discuss international oil market

Cable: Saudi concerns about energy and climate change

Cable: Saudi oilfields are 'sick'

ON THE WEB

Airlines on speculation

MORE FROM MCCLATCHY

Speculators charged with manipulating oil market

Speculation explains more about oil prices than anything else

Senators call for crackdown on oil speculators