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Sheikh Yamani on Oil's Pendulum

By Stanley Reed It's hard to think of anyone with a richer history in the oil industry than Sheikh Ahmed Zaki Yamani. As Saudi Arabia's Oil Minister from 1962 to 1986, he was a key player in the first oil crisis following the 1973 Arab-Israeli war. And he was around to see production plummet in the late 1980s, as prices in the $30-plus per barrel range killed off world demand. Since 1990, he has been watching the oil markets and OPEC from his London think tank, the Center for Global Energy Studies (CGES).

Yamani, now in his mid-70s, was his usual quietly provocative self as he held court at a CGES conference in London on Mar. 22. The goateed former oil supremo blamed Saudi Aramco, the Saudi National Oil Company, for thwarting a recent effort led by Saudi Foreign Minister Saud Al Faisal to bring international oil companies back into the Kingdom to explore anew for oil.

For Yamani, today's high prices evoke a sense of déjà vu. "History is repeating itself," he said "In the late 1970s, we thought the price would keep going up." But by 1986, oil barrels were back down in the teens, and Saudi Arabia was forced to sharply slash production. Yamani predicted that today's high prices will eventually curb oil use and drive down demand and price. "It takes time," he said. "It may take two years, but over the long term it will have an impact."

PSYCH OUT. Yes, the world has changed quite a bit over the past three decades, Yamani allowed. The Saudis, for instance, now have a much more developed economy -- and far more mouths to feed. For that reason, the CGES estimates, they need to see a long-term average price of above $30 per barrel, well above the existing average in the low $20s.

Another big change: the proliferation of speculators. Measured by fundamentals such as inventory levels, the oil markets aren't particularly tight these days. Many market participants say heavy buying by hedge funds and other financial types has played a sizable role in the current price run-up. If market psychology changes, these funds could push prices down even faster than they have risen. "In the final analysis, fundamentals will work," Yamani predicted.

To avoid repeating the roller-coaster rides of the past, OPEC should be doing more to bring prices down to reasonable levels today, Yamani said. Saudi Arabia, which produced 9.25 million barrels per day in February, according to CGES, now has around 11 million barrels per day in capacity, having opened two new fields. The Saudis should be producing at 10 million barrels per day or even more, he added.

SHIP IT ON. Saudi installations are well-protected, with the exception of coastal refineries. But attacks on these facilities, which Yamani said were probably being closely watched now, would disrupt production only of oil products, not crude. He recommended that the Saudis put oil on tankers and send the cargoes toward the U.S. and Europe. It doesn't matter what kind of oil it is. Even if the cargo is less desirable heavy-grade oil, the move would send a signal worldwide and "would take the heat from the situation."

But will his countrymen take such proactive steps? Yamani points out that, for now, $50 oil is a joy to the Saudis and their OPEC colleagues -- as well as to the big international companies. Just as in the 1970s, the economic pendulum will swing back to buyers once again, but it may take years. Reed is BusinessWeek's London bureau chief

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