President Bush on his trip to Saudi Arabia made it clear that high oil prices were hurting the American consumer and could cause an economic slowdown. "High energy prices can damage consuming economies," he said amidst signs that the housing crisis was finally spilling over to other sectors of the economy.
The Saudi oil minister however gave no assurance about increasing output. He said that the Saudis, responsible for a third of OPEC's output would increase production when the market justified it.OPEC ministers are meeting in Vienna on February 1st to consider raising output. The Saudis are the most influential member of the oil cartel because of their large share of its output.
President Bush also acknowledged the role of supply and demand in determining prices. He accepted that a part of the rise in prices was due to rising demand from China and India.
The Saudi oil minister, Ali Naimi said that oil is not the only reason for the slowing American economy. "The concern for the US economy is valid, but what affects the US economy is more than supply of oil ," he said.
He was obviously referring to the fundamental shift that is taking place in the world economy. Years of reckless outsourcing have pressured US wages to the point that many think that US real wages are declining, and that the inflation rate is low only because of cheap imports from China.In such a scenario rising oil prices impact the US consumer adversely. On their part the Saudis no longer have the ability to control oil prices like they used to in the past. For one they have very little spare capacity left and are not in a position to flood the market with oil as they once were, and secondly an increasing portion of the world demand is being met by non-OPEC sources over whom they have little influence. This is not to suggest that they are not concerned about the slowing US economy. In fact they are very worried at the prospect of the US economy sliding into recession, as it would mean further pressure on the dollar, which would substantially reduce the value of their huge dollar denominated assets, besides a likely collapse in world oil prices.
The US government on its part is anxious to get some reassurance that OPEC will raise output, because the only option before it to rescue the economy from recession is to cut interest rates aggressively. This would however weaken the dollar further and have the effect of raising commodity prices, which the US can ill afford at the moment. This is an election year and the stakes are high.If the US economy goes into recession then there is nothing on earth that can put another Republican in the White House.