Geopolitics and strong demand to keep oil prices high (page 1 of 2)

Despite strong pressure from the Bush administration on OPEC to delay its planned production cut, the position of Saudi Arabia, to reduce supplies, prevailed.

More important than the immediate impact on oil prices, OPEC's action signals the depth to which U.S. foreign relations with Persian Gulf countries have plunged in the year since the U.S. invasion of Iraq. U.S. foreign relations with other key oil producing countries, including Russia and Venezuela, have also weakened considerably over the past year.

Increasing antagonism between the world's largest oil producers and the Bush administration will keep world oil supply lean through at least the end of 2004. With supply diminished, oil demand, particularly in Asia, will remain strong, pushing international oil prices above $40 per barrel.

Saudi Arabia holds the world's largest petroleum reserves and accounts for over one-third and one-half of total OPEC oil production and spare production capacity, respectively. Its dominant position in OPEC and importance to world oil supply has made strong relations with Saudi Arabia a priority for the United States government over many administrations.

In the past, strong relations with Saudi Arabia gave the U.S. considerable influence over OPEC, helping to ensure that international oil prices remained at levels acceptable to consuming countries. But over the past three years, relations between the Bush administration and Saudi Arabia have deteriorated substantially.

The role of Saudi nationals in the terrorist attacks against the U.S. in September 2001 instigated this deterioration. The deterioration in relations advanced with the U.S. invasion of Iraq, which Saudi Arabia, along with many other Gulf countries, opposed. These countries opposed the War in Iraq specifically because they feared it would strongly destabilize the entire region - a fear that has been realized.

In addition to the chaotic conditions accompanying the U.S. occupation of Iraq and growing instability there, terrorist attacks have occurred in Saudi Arabia, Morocco and Turkey. The conflict in the Palestinian Territories has escalated to heights unimaginable two years ago and the Bush administration continues to threaten Syria and Iran.

Washington has succeeded in alienating almost every country in the Middle East. Against this background, it's no great leap to infer that many of the region's governments would be happy to see President Bush defeated in this year's presidential elections, potentially heralding a change in U.S. foreign policy and the return of stability in the Middle East.

While the Gulf countries have no influence over U.S. foreign policy, they do have modest leverage over the U.S. economy via their ability to control oil supply and therefore international oil prices. High oil prices will undermine the U.S. economy, threatening President Bush's reelection.

Russia is the world's largest crude oil producer and its second largest oil exporter. Like Saudi Arabia, Russia has strong influence over world oil supply and international oil prices. Relations between the U.S. and Russia, though seemingly strong following the terrorist attacks in the U.S., have deteriorated sharply over the last year. Russia also strongly opposed the U.S. invasion of Iraq.

While Moscow was loathe to see the Middle East destabilize, it was even more concerned with the potential of increased instability in Central Asia and in Russia as a result of the war in Iraq.