Saudis: Don't blame us for oil prices

JEDDAH, SAUDI ARABIA (Fortune) -- When King Abdullah of Saudi Arabia entered the cavernous ballroom in the basement of the Jeddah Hilton Sunday, the room rose to its feet. Cell phone cameras flashed. Delegates whispered. And reporters placed bets on whether he would say anything newsworthy.

But there was also a certain amount of desperation in the air as well. The room felt sterile. There were no decorations or special lighting. No flashy graphics or overhead displays. Just a sword-carrying military band and football field-sized rectangle of facing desks - each with a little flag denoting the delegate's home country.

The king called this emergency meeting of world leaders and executives to study the reasons behind the historic surge in oil prices. But behind the scenes, it felt like no one really knew why they were enduring the humid 105-degree weather. Everybody agreed $140 oil was a problem. But no one agreed on what could be done to fix it. Perhaps the chief of Libya's state-owned oil company said it best: "We are coming together to discuss a very important subject, and expected to get an important decision in three hours," he said. "That's impossible."

King Abdullah, who called this meeting just two weeks ago, told the assembled crowd that he understood the pain that oil prices were causing, and that, in particular, he was "concerned with the interests of consumers." But while he confirmed the rumors that his country would modestly increase production, he laid the blame for much of the hike in oil prices on the "selfish interests" of speculators. (He also blamed fuel taxes and increased consumption by developing countries. He did not talk about any lack of supply.) Abdullah urged the delegates to "avoid accusations" and to "reach the real causes for the increase in price."

The Saudis have been under pressure from oil consumers everywhere to increase the country's crude output to, in theory, ease skyrocketing prices. (It is one of the few OPEC countries with significant spare capacity.) But the kingdom had already announced increases and said it would pump 9.7 million barrels a day beginning in July, yet those increases didn't do much to stop the rise in oil prices, which opened near $135 a barrel on Monday.

The worry is that high oil prices will further slow economic growth and lead to lower demand for crude worldwide, like what has already begun to happen in some developed countries like the U.S. Even worse, Saudis worry that alternative fuels will become more widespread and efficient, and hurt their own economy.

But what was more interesting for participants was the attitude of the famously behind-the-scenes Saudis. There was nothing behind-the-scenes about the conference. Visas to the country were practically thrust on reporters. Government oil ministers walked around the crowd answering questions. Even tours to Saudi oil fields were arranged. "You could call this one big PR stunt," said the chief executive of one major U.S. energy company.

Indeed. The king used much of his speech to tout a $500 million loan program for unspecified energy projects in developing countries and to push for OPEC to create a $1 billion fund to help those countries pay for expensive oil. The Saudi papers ran banner headlines the next morning calling it "Abdullah's energy initiative." It's quite an initiative - in a summit supposedly about how to lower oil prices, the king essentially announced something that could help keep energy prices high, a subsidy per se. And fuel subsides are part of the reason oil prices are defying the laws of economics. Why does China's energy use keep growing so fast? Drivers there are paying $2.60 a gallon. (Saudis pay about 80 cents per gallon - no wonder there was a line of SUVs parked outside the conference.)

In the end, the conference's final statement didn't resolve much: "Spare capacity throughout the oil supply chain is important for the stability of the global oil market," the statement read, which also noted "the transparency and regulation of financial markets should be improved."

But maybe that was what the Saudis had planned all along. Printed in the center of the front page of the Arab News on Sunday was a quote from the deputy minister of petroleum, Prince Abdulaziz bin Salman: "If the oil prices do not come down the day after tomorrow, it doesn't mean that this conference has failed," it read. "We are looking at the complete picture and trying to come up with long-term solutions." But perhaps it is those long-term solutions that should scare him the most.