[OIL PRICES] The UK´s Prime Minister, Gordon Brown clashes with oil nations over causes of price surge

The last june 22, Gordon Brown today clashed with leading oil producing nations by insisting that fundamental market imbalances, rather than speculative pressures, were driving up oil prices and creating the world's third and worst oil shock.

Gordon Brown was in Jeddah at an unprecedented one-day oil summit of producers and consumers convened by Saudi Arabia, saying it was the duty of the world leaders to address the biggest crisis facing the world. Brown was the only major world leader to travel to the summit among the 35 nations attending the hastily convened conference.

Gordon Brown's analysis of the causes of record oil costs was at odds with the OPEC president, Chakib Khelil, who reiterated opposition to increased production by saying that "the price is disconnected from fundamentals" of supply and demand.

"We believe that the market is in equilibrium. The price is disconnected from fundamentals. It is not a problem of supply."

The Indian finance minister, Palaniappan Chidambaram, agreed. He said producers and consumers should "wrest control" of oil trading by agreeing to restrict prices.

"Surely demand and supply cannot explain what has happened over the last 12 months," Chidambaram said. "Oil prices were $70 a barrel in August 2007 and how is it that they've doubled when there has been no dramatic change in demand?"

But in the increasingly divisive debate on the cause of the quadrupling of oil prices since 2000, Brown has support from the US and least some OPEC members, notably Saudia Arabia, the largest oil producer. Under diplomatic pressure from America and Europe, Saudi Arabia increased production in May by 300,000 barrels a day, to 9.45m barrels a day. Oil minister Ali al-Naimi has said he will increase production by 2%, to 200,000 barrels a day, next month.

Brown addressed the conference with an offer of a long-term deal whereby the oil consuming nations will diversify energy supplies, moving into nuclear and renewables, and the oil producing countries will increase production, and invest some of its $3 trillion oil revenues in western renewable technologies.

In the short term, there was a clear need for extra oil production Gordon Brown said. In a speech to the conference he said "all of us need credible future commitments on increased oil supply because even with further action we propose to tackle climate change, demand for oil will continue to be strong over the medium term."

He claimed his new deal could bring an end to "the zero sum game between producers and consumers" from which no one benefits. He insisted the world has to address not just short term under-production of oil, but the long-term boom in demand likely to come from China and India, a surge that requires the west to look for new sources of secure energy.

He told reporters in Jeddah that over the next few years China will see car ownership grow from 37m to 100m, a further 100 airports will be constructed and 1,000 cities built.

He said: "Anyone looking at it knows there is more demand than supply, and it is the same if you look at future years due to the rise of China, India, Asia, and equally importantly, the rise in oil consumption in the oil producing countries from Nigeria to the Arab countries. So whatever the impact of speculative forces, the real issue, the concrete problem is how demand can be brought into supply with demand".

Brown said he was willing to examine the impact of speculation — billions of dollars in financial investments in oil by investors hedging against a weakening US dollar — but stressed it was not the predominant source of the crisis.

Stressing the severity of the crisis he said: "We have had the credit crunch, we have had food prices rising very fast, we have had a trebling of oil prices which is creating a huge amount of stress because of its effect on petrol, gas and electricity and the follow through to the rest of the economy. This is the third great oil shock in three decades, but this is the worst oil shock because of the severity of the rise in price, and the unpredictability and volatility in the markets."

In signs that Gordon Brown has made progress in putting himself in the vaguard of the international discussions on oil price, Gordon Brown disclosed that Britain will host the follow-up summit in London to build the shared anaylsis of what he described as the biggest problem of the world. The London meeting will probably be held in October.

The Saudi summit was seen as a high risk venture since if it fails to convince the markets there are fears that oil prices already pressing $140 a barrel will rise further this week. Light, sweet US crude oil futures closed at $134.62 on Friday, despite a 17% Chinese rise in petrol prices, the country's first rise since November.

Pointing to the fall in oil production in Nigeria prompted by sabotage at the weekend - predicted to cause a 120,000 barrels a day drop in production — Brown did not suggest that yesterday's summit itself will cause a short-term drop in the oil price.

That view was echoed at the conference by the chief executive of Royal Dutch Shell, Jeroen van der Veer. He said: "What I've heard so far are basically all good ideas, but it will probably not change the price tomorrow morning.

"The mood of the meeting is all about investment, that is the way to go. For investment we need fiscal stability and security."

Brown stressed his determination to balance the UK energy portfolio by a big expansion in nuclear and renewables, including plans to produce 15% of the UK's energy with renewables by 2020.

Gordon Brown steered clear of his recent more populist attacks on OPEC in deference to the Saudi decision to cooperate over the escalating high oil price. Instead he called for Gulf states to be given significantly more opportunities to recycle increased oil revenues — whether through sovereign wealth funds or directly into alternative energy investments in developed economies.

He said oil consuming economies should follow the UK lead that we in the UK have set by offering genuine openness and partnership in our investment markets to those operating under transparent commercial principles".

He said Britain was already involved in such discussions with the Abu Dhabi Investment Authority, the Qatari government and United Arab Emirates.

World production is currently just more than 80m barrels a day, an it is estimated there is at least 3m spare capacity.

Source: The Guardian|by Patrick Wintour