How to Lower the Price of Oil

The road to cheaper gas at the pump runs through Riyadh.

If there's one thing that unites U.S. President Barack Obama, top-ranking Saudi officials, and Americans at the gas pump, it's this: The price of oil is too damn high. What's more, given physical and market realities, this should not be so. Despite the sanctions on Iran and the threatened loss of its export production, the world has no shortage of oil.

Several oil suppliers are more than capable of picking up the slack left by Iran. U.S. and Canadian production, both actual and in the near future, is at historically high levels. And more significantly, Saudi Arabia's potential output is an unprecedented 12.5 million barrels per day.

Still, fears abound about a shortage of oil. The United States and Europe are now contemplating the extraordinary, and unnecessary, measure of releasing oil from their strategic petroleum reserves to calm markets. And in a rare and significant move, Saudi Oil Minister Ali Naimi recently published an opinion article in the Financial Times expressing frustration at his inability, through reassuring statements, to bring down the price of oil, despite its abundance and the kingdom's ability to satisfy all demand.

There is a double paradox here: The leading oil-exporting country in the world not only would like to see lower prices, it finds itself powerless to achieve the desired result. Nonetheless, the key to lowering prices lies with Saudi Arabia and, remarkably, it involves straightforward adjustments to the way oil is marketed and sold.

There is, of course, solid logic behind Saudi Arabia's ambitions to bring down oil prices. Higher prices are not in the long-term interest of producers -- they are bad news for the global economy, and destroy demand in industrial and developing countries alike. The kingdom also has political reasons to be leery of elevated prices: It is concerned that the present high price is discouraging some oil-importing countries from curtailing their purchases of Iranian oil, thereby strengthening Tehran's hand with abundant financial revenues.

Saudi Arabia is ready to increase its already high production volume further to 12.5 million barrels per day, an all-time high, and its storage facilities abroad have been filled to the brim, according to Naimi's article. It is anxious to assure international buyers that it could meet any shortfall of supplies -- for example, if Iranian oil disappeared from the market. Saudi Arabia may not want to be seen as actively undermining Iranian oil exports, but it is in fact doing just that.

So, why do oil prices remain stubbornly high? Why does the market behave irrationally and not want to listen? The reason is simply that Saudi Arabia deliberately refrains from using the market power that it might command. This is the result of past experience, when Saudi Arabia's market share and revenues suffered as a result of OPEC's aggressive price setting policy that existed before 1985. In the years prior to that date, Saudi oil production collapsed from an all-time high of 10.3 million barrels per day to a minimum of 3.6 million, in the futile attempt to defend OPEC imposed prices. Ever since that experience, Saudi Arabia has refused to be tied to a rigid price target.

As a result, Saudi Arabia is a price taker. Through press announcements and speeches, Saudi officials signal their intentions to international buyers and sellers and attempt to influence market sentiment, but the kingdom is not active as a seller on the open market. In practical terms, Saudi Arabia does not allow its oil to be traded, nor does it offer its oil without restrictions for resale. The kingdom only sells to final users -- that is, to refiners, who process the crude oil themselves. That means oil may be available, but will remain unsold if refiners do not have a demand for it.

Saudi Arabia should behave instead like a central bank that periodically conducts auctions for government paper. The interest rate -- or, in this case, the price of oil -- is then determined by the result of auctions and trading on the secondary market. Saudi Arabia, after all, is and acts like the central bank of global oil.

If Saudi Arabia allowed its crude to be traded -- that is, sold by the original buyer to some other final or intermediate client -- the abundant availability of Saudi oil would drive prices down. But the Saudis are afraid of playing an active role in the market because they do not want to be accused of "controlling" the price of oil. There is, however, a lot of ground between "controlling," at one extreme, and exercising no influence on the market on the other. It is in fact unlikely that Saudi Arabia could "control" the price even if it took a very active role in the market -- but it could certainly have an influence. Yet, the stereotype of OPEC as a monopolist intent on squeezing consumers is so deeply rooted that Saudi Arabia does not want to be seen influencing prices at all.

The United States and other leading consumers should encourage Saudi Arabia to play a more active role. A global oil market in which Saudi Arabia exerts its proper influence would be less volatile and more closely representative of the equilibrium of supply and demand. It is in our best interest that Saudi Arabia should succeed in moderating prices.

As the revival of oil and gas production in North America and in other parts of the world gains strength, it will be in the interest of all to maintain prices at a level that is neither too low nor too high. A much lower price would nip the expansion of new sources in the bud, while higher prices could abort the fragile economic recovery. Saudi price targets, which lie in a band that hovers around $100 per barrel, are not out of line with the interests of the industrial countries.

Saudi Arabia should be supported, and even urged, to be a price leader rather than a price taker. Oil prices should be discussed in the context of G-20 and other international gatherings much in the same way as interest rates or exchange rates are. No market can function well if the No. 1 supplier remains on the sidelines. Getting Saudi Arabia in the game will be good for American consumers, and bad for the mullahs in Tehran.



The Not-So-Great Firewall of China

Social media won't drive the downfall of the Chinese Communist Party, but it is forcing government to be more transparent and responsive to the public.

Every news organization needs a social media strategy. Even China's government-controlled Xinhua News Agency now "tweets" news bulletins through Twitter-like microblogs called weibo -- through which more than 300 million users share details of their daily lives, jokes, gossip, and news.

Chinese companies running weibo services are required by the government to censor and monitor their users, blocking politically sensitive content. Yet despite weibo's best censorship efforts, China's chattering classes have outsmarted the system, using literary allusions, code words, and innuendo to pass around juicy leaks and tidbits from the foreign media about the alleged murder of English businessman Neil Heywood by associates of Gu Kailai, wife of the former Chongqing Communist Party Secretary Bo Xilai, whose fall from grace has precipitated the biggest leadership crisis in China since the Tiananmen Square crackdown in 1989.

Censorship has even backfired in bizarre ways. After a long silence by official media on the subject, last week at 11 p.m. Beijing time Xinhua attempted to tweet an official news bulletin announcing that Bo had been stripped of his party posts and was under investigation for "serious discipline violations." Sina Weibo, the most popular of China's weibo services, censored Xinhua's tweet.

The use of Bo's name had triggered the company's automated censorship system -- programmed, ironically, in compliance with central government orders to block all tweets containing Bo's name. At the same time, Sina posted the text of the same Xinhua bulletin to its own news feed. Five minutes later, in response no doubt to irate phone calls, Sina unblocked Xinhua's tweet. Xinhua then posted a tweet (later removed) complaining that its own breaking story had been scooped by Weibo. This provoked a flurry of sarcastic commentary by witty weibo users, joking about how the government's propaganda apparatus had fallen victim to its own regulations.

The lesson of this episode? China's censorship and propaganda systems may be complex and multilayered, but they are obviously not well coordinated. Writing in the Guardian this week, dissident artist Ai Weiwei declared that while China's Internet censorship system may be the envy of autocrats worldwide, China's leaders need to understand that in the long run "it's not possible for them to control the Internet unless they shut it off." He was half right: While the Chinese government's tactics may be ham-handed and likely doomed to failure in the long run, they are working well enough to keep the Communist Party in power for the short to medium term.

In unpacking social media's role in China's latest political power struggle, it is important to understand that Bo Xilai's political downfall actually strengthens the power of the central government, currently led by President Hu Jintao and Premier Wen Jiabao.

Bo was a popular -- and populist -- challenger to the political and economic status quo. He built an independent power base in Chongqing, an internationally celebrated megalopolis in western China. His neo-Maoist ideology gained an impassioned following among conservative nationalists as well as members of China's growing urban poor who blame the current leadership's economic policies for unacceptable levels of economic disparity. Bo represented a political threat to the liberalizing economic and financial reforms that Hu and Wen say they are determined to carry out before they pass the baton to a new set of leaders in October.

Chinese blogger Michael Anti likes to describe weibo as a public opinion "battlefield." Shutting down weibo at this point, now that it has become such an integral part of so many Chinese people's social lives, would be impossible without provoking widespread public anger against the government. Instead, the central government's strategy is to "occupy" weibo to defeat challengers like Bo in the court of public opinion -- while doing all it can to weigh the scales in its own favor.

Almost every week, there are stories in the press or on Chinese social media about what even the official Chinese media call "hot online topics": stories about how people in a particular village or town used weibo to expose malfeasance by local or regional authorities. This calls the central government's attention to problems which it can then swoop in and solve, making the central government look like it is more concerned with the common people than are local officials. Citizens even manage to use cyber-vigilantism -- popularly known as the "human flesh search engine" -- to bring about the resignation of badly behaved officials. Sometimes laws and regulations are even changed, and policy reforms implemented, as the result of concerned citizens' online campaigning.

Clearly, China is no longer a classic Cold War-style authoritarian state. I call its new style of information-oriented governance "networked authoritarianism." Thanks to the Internet in general and social media in particular, the Chinese people now have a mechanism to hold authorities accountable for wrongdoing -- at least sometimes -- without any actual political or legal reforms having taken place. Major political power struggles and scandals are no longer kept within elite circles. In the case of the Bo-Gu-Heywood scandal, social media "is forcing a level of transparency in how the government handles this case that never used to exist," explains media entrepreneur and blogger Jeremy Goldkorn, who has been living in China since the 1990s. China's political system may not have changed, yet the public has become both a constituency and a pawn in the nation's political battles.

If anything, weibo may even help the Communist Party re-centralize its political power at the expense of local officials and regional governments, which over the past three decades of economic reform have gained greater autonomy from Beijing. The weibo companies are all headquartered in the capital and required to take orders from the central government. ("For a local government to have content blocked or deleted requires getting on a plane to Beijing," Anti explains.) The advent of weibo has created a cycle in which the public is increasingly emboldened to use social media to report on localized abuses by individual officials, with some reason to hope that once the central government is alerted to the problem justice will prevail.

At the same time, the consequences of any efforts to organize protests, meetings, or movements focused on criticizing or changing the central government remain the same as they been for more than two decades, since the 1989 Tiananmen Square crackdown. Liu Xiaobo, who circulated the "Charter 08" treatise calling for multi-party democracy and who won a Nobel Peace Price in 2010, is serving a 10-year jail sentence. Many signatories of his charter received visits from the police. In early 2011, dozens of people who re-tweeted calls for "jasmine protests" inspired by Tunisia's "Jasmine Revolution" were questioned or arrested. Weibo postings by intellectuals calling for political reform are quickly removed, and have not been allowed to go viral as the Bo Xilai rumor postings managed to do. Chinese journalists are being muzzled more tightly than ever to prevent them from conducting investigative reporting that might damage the central government's power.

Meanwhile, Beijing is doing everything possible to remind China's Internet users of who is in charge. Several websites popular with Maoist supporters of Bo Xilai have been shut down or suspended. The People's Daily issued an ultimatum against online rumors and people who spread them. The professional media has received strict instructions not to report unauthorized news on the Bo-Gu-Heywood case. More than 1,000 people have been arrested for "spreading rumors."

Last week, the "great firewall" system that normally blocks blacklisted foreign websites temporarily blocked all foreign websites. Since then, bloggers and Internet industry insiders report that the overall level of website-blocking has noticeably increased. Postings by weibo users with more than 10,000 followers will be individually vetted. The government is also pushing the weibo companies to implement a "real name" registration system by the middle of the year, which means at least in theory that it will become much more difficult for weibo users to disguise their identity from the authorities, if not from the general public. "If it is really implemented," says Beijing-based Internet investor and commentator Bill Bishop, "the real effect will be a reminder to people that the government is watching and they should be careful about what they say."

The paradox of the Chinese Internet is that despite all of these measures, weibo remain a lively place, where most Chinese Internet users feel freer to debate and discuss matters of public interest than ever before. A wide range of policy positions, political loyalties, and ideologies can be found throughout Chinese society, and thanks to the Internet those differences have become publicly visible for the first time. Millions of Chinese Internet users engage regularly in public-policy debates because they feel that at least in some cases, the weight of public opinion can make a real difference.

These trends in the long run are great cause for optimism about what the Internet means for China's political future. As Anti puts it, "The political change will come from non-Internet factors, but thanks to the Internet people will be more ready to do something positive with it."