The central bank takes stock

OPEC, the oil producers' cartel, has lifted its quota ceiling by 500,000 barrels per day in an effort to cool oil prices. That prices continued rising to new highs after the move suggests that someone is betting big against oil's kingpins

BEFORE this week's meeting of the Organisation of Petroleum Exporting Countries (OPEC) in the old Persian capital of Isfahan, Saudi Arabia's oil minister, Ali Naimi, had soothing words. "We care about consumers," he said, "especially in the developing countries, and we don't want to hurt them."

To anyone suffering as oil prices have climbed, Mr Naimi's remarks will come as a surprise. After all, it was Saudi Arabia that masterminded the revival from $10 a barrel in 1999. The Saudis worked out that watching OECD countries' stocks, and slashing OPEC output if they rose, was a superb way of propping up the oil price. The Saudis long maintained that they wanted to keep prices in the $20s or low $30s. Prices have risen nonetheless: West Texas Intermediate topped $56 for the first time on Wednesday March 16th, the day the cartel met. On Thursday the record-breaking continued, with crude touching $57.

It now seems, though, that Saudi Arabia does want prices to fall a bit. The Isfahan meeting was expected to be a routine affair, at which the cartel merely rolled over its production quotas. Because global oil consumption always falls in the second quarter, as demand recedes from its peak in the northern hemisphere's winter, raising quotas now seemed an odd idea.
And yet, at Saudi Arabia's insistence, that is precisely what OPEC has done. The cartel has agreed to lift its quota ceiling by 500,000 barrels per day (bpd) immediately, to 27.5m bpd, the highest ever, and to raise it by the same amount soon if market conditions warrant. Most cartel members are already cranking out all they can, however. That is why, argues Vera de Ladoucette of CERA, an energy consultancy, ministers essentially blessed efforts by Saudi Arabia, Kuwait and the United Arab Emirates (the only cartel countries with any spare capacity) to raise output.
The deal would not have happened without Saudi bullying. Most members, including Iran, this week's hosts, opposed expanding output; some, like Venezuela, have expressed a desire for still higher prices. But the Saudis said that they would raise output with or without the approval of other members.

Ms de Ladoucette is convinced that the Saudis "want to put a lid on prices". They have historically been a voice of moderation within OPEC. Lately, they have said that they would like to see prices stay between $40 and $50; but they fear prices could shoot up to $60 or higher. In the past, they maintained a large buffer of spare capacity that allowed them to boost output quickly to cool prices. That earned them the nickname of the "central bank of oil".

Because years of under-investment nearly wiped out that buffer, the Saudis have been powerless to cool prices recently. This has worried the International Monetary Fund into giving warning that OPEC must expand spare capacity to 3m-5m bpd to ensure the health of the global economy. The Saudis now seem serious about reining in prices. They have embarked on the largest expansion programme in many years, and aim for a buffer of 1.5m-2m bpd. They have unilaterally raised output in recent weeks. Mr Naimi now says he actually wants to see oil stocks grow in coming weeks, so that the world could weather a sharp surge in demand next winter.

Vincent Lauerman of the Canadian Energy Research Institute, a think-tank, says this is "absolutely a U-turn". A global build-up of stocks, he reckons, "is the quickest way for OPEC to increase supply flexibility in the market". He notes that it will take time to rebuild spare production capacity, especially when world oil demand is growing by 2m bpd or more a year.

Whether the Saudis will succeed in moderating prices remains to be seen. This week's new record suggests that someone is betting against oil's central bank.