It was to be a swap felt around the world - a plan privately
discussed by the world's largest oil exporter and the globe's biggest consumer
to take the heat out of $120-plus oil prices.
In the weeks leading up to the failed June OPEC meeting, US
and Saudi officials met to discuss surprising the market with an unprecedented
arrangement: exchanging urgently-needed high-quality crude oil stored in the US
emergency reserve for heavier, low-quality oil from Saudi Arabia, according to
people familiar with the plan.
The idea involved shipping some of the light low-sulphur, or
"sweet", crude out of the US Strategic Petroleum Reserve to European
refiners, who needed it after the war in Libya cut off shipments of its premium
crude varieties coveted for making gasoline and diesel.
In return Saudi Arabia would sell its heavier high-sulphur
or "sour" crude at a discount back to the United States to top up the
caverns that hold America's emergency stocks.
It was a striking suggestion, one that would have
demonstrated Washington's readiness to put the SPR to extraordinary use and
Riyadh's willingness to work creatively with consumers to quell high prices.
But it did not make it past the drawing board, four sources
familiar with the talks confirmed. The sources disagree on which country
proposed the plan. Two said it fell apart because Riyadh was not willing to
subsidize European or US customers by discounting its crude prices below market
The swap idea illustrates a recently deepening engagement
between Saudi Arabia and the United States on oil affairs under President
Barack Obama, and shows how high the stakes were ahead of the meeting of the
Organization of the Petroleum Exporting Countries on June 8 in Vienna.
With gasoline prices topping $4 a gallon in many parts of
the United States, Obama was seeing his support ebb in opinion polls, just as
the White House was beginning to focus on the 2012 election.
The Saudis were concerned about the health of the global
economy with oil prices surging above $100 a barrel. Riyadh knew that high
prices, while good for short-term income, would cut fuel demand over the longer
Washington had pressed Saudi Arabia to boost oil production
at least twice ahead of the OPEC meeting that ended in failure, sources said.
After war broke out in Libya and its oil output fell, the
Saudis complied with the initial request, but they weren't happy when European
refiners didn't jump to buy their crude, even a "special brew" of
lighter quality, an Arab official said.
"We need someone to take our crude. We don't just want
to store it," the official said.
Industry sources described a "difficult" Riyadh
meeting that a US delegation held about a month ago with Saudi Oil Minister Ali
"They were told, 'If you're going to find us extra
refineries that are asking for demand, we'll supply that,'" the Arab
Deputies from the US Energy and Treasury departments also visited
Riyadh to make the case for stepped-up oil production, a source close to the
Saudi government said, although the timing of this meeting was unclear.
One of the officials who attended that meeting was Jonathan
Elkind, Principal Deputy Assistant Secretary for Policy and International
Affairs at the Energy Department, a source said.
Within days, Elkind was flying to Paris for a regular
meeting of the board of governors of the Paris-based International Energy
Agency, which speaks for 28 industrialized oil consumer countries.
After that meeting, the governing board released an
unusually blunt statement urging OPEC to raise output and announcing that it
would consider using "all the tools" at its disposal -- a clear
reference to emergency reserves.
The US State and Energy Departments would not comment on
whether the meetings took place or offer other details, while the White House
has acknowledged regular talks with producers without being specific about
Set up in 1974 to protect oil consumers after the Arab oil
embargo, the IEA has held an open and cordial dialogue with OPEC ever since the
Gulf War in 1990-1991, one of only two times it has authorized a global release
of strategic stocks.
But the May 20 missive suggested a new cooling in the
relationship between the world's big oil consumers and producers, and provoked
a backlash from some in OPEC.
"Strategic reserves should be kept for their purpose
and not used as a weapon against OPEC," OPEC Secretary General Abdullah
al-Badri said Tuesday.
"We never interfere in the IEA and really we don't want
them to interfere in our business. They should do it in a professional manner.
We should not talk to each other through the media."
Washington appears to have mostly heeded that comment, and
kept quiet about its engagement, in contrast to previous administrations.
In April, Obama - who has several times blamed speculators
for the run-up in prices - made a rare public call for world oil producers to
"We are in a lot of conversations with major oil
producers like Saudi Arabia," he said in a Detroit television interview.
The tension within the cartel boiled over last week in
Vienna, when seven members of the group balked at a Saudi-led plan to increase
production. While ministers said the breakdown was caused by differing views
over the market outlook in the second half of this year, Iran blamed
unspecified "consumer countries" for influencing the debate.
"What happened shows OPEC is an independent
organisation," said OPEC governor Mohammad Ali Khatibi. "If one wants
to exert pressure to make the others give up - no."
The kingdom declared it would go it alone. Sources say Saudi
Arabia is raising production in July by nearly 1 million bpd to around 10
million bpd, although Brent crude oil prices have continued to press higher,
reaching a five-week peak of more than $120 a barrel on Tuesday.