After this Monday’s meeting between the President and Crown Prince Abdullah in Crawford, Texas, however, there is little evidence that the President is making progress in achieving his goal.

Even though the May 1st target date originally being considered by OPEC for adding an additional 500,000 barrels a day of production is just a few days away, the Saudi’s have not yet made any specific commitment to increase production – either immediately or at any time later this year.

Instead, they have merely repeated previous statements pledging to supply customers with “as much as they order” up to a claimed maximum production capability of 11.0 million barrels per day.

Rather than responding directly to the President’s demands, their focus instead has been primarily on efforts to increase production longer-term.

While these efforts are certainly welcome, they are likely to have little or no impact on global supply until the tail-end of this decade.

Why are the Saudi’s continuing to dance around this key issue? Why did President Bush consider this issue sufficiently important to put his own prestige on the line by personally making a statement last week putting pressure on the Saudi’s publicly to increase production (albeit in the form of a seemingly off-hand comment in a television interview), rather than sending his message privately or directing other Administration officials to speak on his half? Why did the Saudi’s refuse to make a specific commitment in response? And what does all of this mean for likely oil prices later this year?

Of course, only the Saudi’s know why they refused to step up to the plate and make a specific commitment to increase production.

Notably, the Saudi’s have been talking about the possibility of increasing production above current levels of 9.5 million barrels per day for almost a year now.

Up until now, every time the target date for instituting a potential increase draws near, they have found an excuse not to act.

This time, having effectively run out of excuses, they resorted to a different tactic – i.e., simply refusing to address the issue head on.

This refusal to make a clear commitment undoubtedly is no accident.

Many -- including Matt Simmons, who has studied the Saudi oil field more closely than anyone else I know, and is coming out with an important new book on this topic, Twilight in the Desert, in less than 3 weeks -- doubt that the Saudi’s can increase production above the 9.5 million barrel per day level, at least without risking permanent damage to their fields. Last week, in his interview with Ron Insana on CNBC, President Bush appeared to join the ranks of Matt and a number of other well-informed skeptics who believe that the Saudi’s already are producing at or near maximum achievable levels.

Notably, the President has not subsequently given any indication that statements by either statements by Oil Minister Ali ali-Niami responding to his remarks or his meeting with Crown Prince Abdullah have given him any reason to change his views.

Even if the Saudi’s are physically capable of producing more oil, however, it is possible that they can only sustain increased production levels for a brief period. (The International Energy Agency’s definition of “spare” capacity – a term which the Saudi’s frequently reference in their public statements – requires only that an increase in production be sustainable for 90 days.)

Further – and more significantly – any additional production capability, to the extent it exists, in all likelihood consists of heavy sour crude. This heavy, sour crude, however, may not be useable in the current world market, since the limited ability of existing refineries to process heavy crude already appears to be fully tapped.

As a result, the issue of whether the Saudi’s are physically capable of producing slightly more than 9.5 million barrels of oil may be largely an academic issue.

In all likelihood, even if they are capable of expanding their output to a limited degree for a limited period of time, there is not any market for the type of oil they are capable of producing (assuming that at least a modest increase in production still is feasible for a limited period of time).

As a practical matter, therefore, the Saudi’s repeated commitment to supply customers with all of the additional oil they might order (which potentially could be met by withdrawing oil from tank farms, without any need to actually increase production), may not be a commitment to do anything, since the Saudi’s may not have any remaining crude oil to offer that their customers actually can use.

Further, even if there were customers for additional heavy sour crude, they might not be able to sustain production for long enough to materially change the overall supply/demand balance in the global market.

It may for these reasons that the Saudi’s seem to be dancing on the head of a pin in their public statements regarding whether they plan to increase production at any time in the immediate future.

Given the limited standards required to satisfy IEA’s definition of spare capacity, it is possible that they genuinely believe that they still have 1 million barrels per day or more of “spare” capacity (i.e., additional production capability that can be sustained for at least 90 days). In the end, whether they actually do, however, may be another matter – even if the test is only whether they can sustain increased levels of output for 90 days.

But they also may be keenly aware that even if in theory they have this capability, it may be of no current use in relieving the growing pressure on the global oil market.

It may be precisely for this reason that they have resisted so adamantly making any specific commitment to increase production above the 9.5 million barrel per day level they already have been achieving since May of last year.

Why then did President Bush push so hard to get to the bottom of this issue, knowing that he might not receive a satisfactory answer from the Saudi’s?

Basically, I suspect that it is because our economic back is against the wall to a much greater degree than is generally recognized by the general public, on Wall Street or even within the energy industry.

Three weeks ago, in its Short-Term Outlook for April, the U.S. Energy Information Administration (EIA) increased its oil price estimate for the remainder of 2005 and 2006 to an average of $ 55 per barrel. This represented the second major increase in EIA’s estimate of global oil prices in just 5 weeks.

Coming from the Department of Energy – which for many reasons is under significant pressure to understate potential price increases – I found this $ 55 per barrel estimate fairly startling (even though I believe it still is much too low).

Even EIA’s $ 55 per barrel estimate, however, is expressly predicated on OPEC increasing production by at least 1.1 million barrels per day between now and the 4th quarter of this year.

For an increase in OPEC production of this magnitude to be achieved in such a short time period, Saudi production almost certainly will have to increase by roughly the same amount. (While it is not yet built into EIA’s estimates, after almost a year of producing at or near maximum levels, I strongly suspect that over the next few months we’ll see the production levels of several other OPEC members begin to decline.)

Further, EIA’s analysis demonstrates that, even with an assumed 1.1 million barrel per day increase in OPEC production over the next 6 months, inventory levels of crude oil and gasoline are likely to decline significantly relative to historical norms between now and the end of the year and to remain at barely acceptable levels throughout 2006 (the end of the period covered by EIA’s forecast).

President Bush undoubtedly was thoroughly briefed on this analysis – which is some of the best work EIA has done to date – well in advance of his meeting with Crown Prince Abdullah on Monday of this week and presumably was aware of it during his interview on CNBC last week.

Both President Bush and Vice President Chaney presumably fully understand, therefore, the extent to which the continued health of the U.S. economy now depends on the Saudi’s increasing useable production by at least 1.1 million barrels per day over the next 180 days.

If this ramp-up in production is not achieved for any reason (starting almost immediately) – either because the Saudi’s are not able to increase production by 1.1 million barrels per day on a sustained basis or because they choose not to do so or because the oil they can produce is not useable in the current world market – the EIA analysis shows quite clearly that all bets are off.

The world market is likely to be short by at least 125 to 150 million barrels of oil compared to the supply levels required to maintain world oil prices at barely tolerable levels.

As a result, EIA’s $ 55 per barrel price forecast effectively will be “out the window.”

Further, unless oil prices increase rapidly enough to reduce demand by more than 1 million barrels per day by the 4th quarter of this year, U.S. and worldwide commercial inventory levels are likely to begin falling at an alarming rate.

No one knows for sure how steep a price increase may be required to drive 125 to 150 million barrels of demand out of the market. But Goldman Sachs’ “Super-spike” price level of up to $ 105 per barrel, originally suggested as the high end of the range of the of the potential market clearing price in 2007, may not be out of the question for this year.

President Bush undoubtedly was aware of all of this when he chose to put public pressure on the Saudi’s over the past several days.

So far, the Saudi response has not been particularly encouraging.

Only time will tell, however, whether the Saudi’s maintain production remains at roughly 9.5 million barrel per day or instead quickly increases to significantly higher levels.

From the EIA analysis, it is clear that there isn’t any time to spare.

To maintain U.S. petroleum stocks at minimally acceptable levels, during this calendar quarter, EIA estimates that U.S. crude imports should average 10.510 million barrels per day.

We’re now three reporting weeks into the quarter.

This is the time of year in which crude inventories and inventories of gasoline generally still increase.

In the first two weeks, however, we fell more than 10 million barrels short of EIA’s 10.510 million barrel per day target for the quarter goal – averaging just 9.790 million barrels per day (i.e., more than 700,000 barrels per day below required levels).

It wouldn’t take many weeks of imports falling this far below required levels, however, to eliminate entirely the current year-over-year surplus relative to historical norms and replace it with a large – and potentially insurmountable -- deficit.

This week, imports suddenly surged by more than 1.0 million barrels per day, to an average of 10.863 million barrels per day – the second largest weekly import level ever.

This offsets almost 2.5 million barrels of the shortfall during the previous two weeks.

For the three weeks combined, however, we’re still running an average of more than 2.5 million barrels per week behind the levels required to meet EIA’s targets for the quarter.

There is no way of telling for sure at this point whether this week or the previous two weeks will turn out to be more representative of import levels for the remainder of the quarter.

The next few weeks are likely to prove critical, however, in determining whether U.S. imports are adequate to prevent inventory levels from falling precipitously later in the year.

Further, while maintenance at Japanese refineries may have freed-up crude for delivery into the U.S. market during the past week, and may help to improve import levels for another few weeks, there is no way import levels can be sustained above 10.5 million barrels per day for any extended time period without increases in Saudi production of the magnitude suggested previously.

Much depends, therefore, on: (i) whether the Saudi’s have the capability to rapidly increase production to at least the 10.250 to 10.500 million barrels range; (ii) whether they choose to do so – and do so quickly; (iii) whether this increase in production can be sustained throughout the remainder of the year; and (iv) whether any incremental crude oil produced by the Saudi’s can be utilized in current refineries.

The answers to these questions may have more impact than any other single factor in determining the continued health of the U.S. and global economies during the remainder of this year.

President Bush was spending his time wisely, therefore, when he decided to focus on these issues this past week.

Hopefully his efforts were more successful than the initial public statements regarding his meeting with Crown Prince Abdullah suggest was the case.

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