(Bloomberg) -- President Joe Biden’s visit to oil-rich Saudi Arabia might heal frayed US ties with the kingdom, but it’s unlikely to resolve the energy crisis plaguing the global economy.
Biden is planning to meet Crown Prince Mohammad bin Salman as the market havoc and rampant inflation unleashed by Russia’s invasion of Ukraine force reconciliation with a country he once condemned as a “pariah.” In a symbol of goodwill, Riyadh and the alliance of producers it leads agreed earlier this month to pump a little extra crude -- and consumer nations are hoping more will follow.
But even if the visit secures a promise of additional barrels, it may fail to cool a rally that has propelled US gasoline to unprecedented levels of $5 a gallon and underpinned the inflationary spiral. Even the prodigious petroleum resources of the kingdom and its partners will struggle to soothe a market that’s facing its biggest disruption in decades as sanctions on Russia take effect.
“The thing is, there isn’t much more oil in Saudi Arabia and the United Arab Emirates to really significantly change the market,” Daniel Yergin, renowned oil historian and vice chairman at S&P Global Inc., said in a Bloomberg television interview. “The supply situation is so razor thin.”
Saudi Arabia and its neighbor, the United Arab Emirates -- effectively the only two producers with significant spare capacity -- hold just under 3 million barrels a day of idle output between them, according to the International Energy Agency in Paris. That’s about 3% of demand.
They would need to deploy all of that -- pumping on a sustained basis at levels rarely if ever seen before -- to offset the losses the IEA expects Russia to suffer in coming months as international sanctions take effect.
And even if they do ramp up, exhausting their spare supplies would only sow fears that no buffer remains to cover future supply emergencies -- like a fresh crisis that escalated in Libya this week.
“That’s the last security blanket that exists for the oil market right now,” said Yergin.
In any case, additional supplies of crude oil may do nothing to address what is arguably a more pressing problem: a shortage of oil refining capacity to make gasoline, diesel and jet fuel.
Years of plant closures have created a bottleneck that’s now doling out bumper profits to refiners, while similarly squeezing motorists and other fuel consumers.
Natural gas prices have also soared because of concern Russian supply could be lost following the invasion of Ukraine, boosting wider energy costs.
“Energy price inflation is a bigger problem than crude oil -- it’s beyond Saudi Arabia and its Gulf counterparts to fix,” said Bill Farren-Price, a director at Enverus Intelligence Research.
The absence of a solution from the Middle East means that fuel costs themselves may remain high until the financial pain forces consumers to drive, fly and purchase less, according to UBS Group AG.
“Lack of investment in new supply globally, low inventories, and dwindling spare capacity” are problems with no easy fixes, said Giovanni Staunovo, an analyst at the bank in Zurich. “Oil prices may need to stay supported to trigger demand destruction and bring supply and demand back into balance.”
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