By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

First it called for a meeting of oil producers and oil consumers.

Now Saudi Arabia has proposed a boost in oil production.

At the end of the day, however, neither of these moves will have any real impact on the ongoing escalation in oil prices.

Let me explain …

The Saudi Spin

When Saudi Arabia called for a summit on high oil prices recently, it said there was “no justification for the current rise in prices” – and used the opportunity to express concern that high oil prices could harm the global economy.

That’s why Saudi Arabia also wants to work with its cartel compatriots in the Organization of the Petroleum Exporting Countries to “guarantee the availability of oil supplies now and in the future,” said Iyad Madani, the country’s minister of information and culture.

Madani made his comments on June 9, at the end of a weeklong Saudi cabinet confab in the seaport city of Jiddah, on the Red Sea. The timing was most interesting, with the comments coming, as they did, just three days after U.S. oil prices posted their biggest one-day run-up in history – when oil surged more than $11 to surpass $139 a barrel.

Let’s be clear here: Saudi Arabia is the world’s largest oil exporter; and the only reason it wants a meeting that will bring it together with both its OPEC suppliers and other international economies (their “consumers” … otherwise known as “us”) is to cover its flank.

Indeed, the meeting hasn’t even started yet and Saudi Arabia is already establishing a protective position that would keep the Pittsburgh Steelers’ vaunted “Steel Curtain” defense from mounting much of a pass rush.

The meeting – also set for Jeddah – will start Sunday. But yesterday (Monday), crude oil prices dropped on the New York Mercantile Exchange for the second trading session in a row on speculation that Saudi Arabia will be increasing its oil production (oil closed at $134.61 a barrel, although “black gold” had actually spiked to a new record of $139.89 before news of the Saudi output increase began making the rounds; crude still costs 98% more today than it did last year at this time).

The Middle East kingdom will pump an extra 200,000 barrels a day next month, Agence France- Presse reported on Sunday, citing United Nations Secretary- General Ban Ki-Moon. This would boost world supply by 0.2%, Bloomberg News reported.
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You have to give them credit: The Saudis are giving this quite the benevolent spin; if they pull this off, it would be among the biggest media coups of the century.

And let’s be honest: The United States would probably try a similar tactic if it were in the same situation.

We would want the world to think favorably of us – and even like us – even as we’re sticking it to everyone. And that’s particularly true with an issue as emotional as this one, since the animosity over high oil prices is literally multiplying by the day, and since global sentiment (among the oil consumers) is becoming overwhelmingly anti-Oil Baron at the moment.

Add in the fact that nearly everybody on the planet is suddenly out beating the bushes, seeking substitutes for oil, with billions (if not trillions) now being earmarked for the pursuit of alternative-energy solutions … if we were in their position then we, too, would have a vested interest in preserving the global-energy status quo and hanging onto our own power base – which, of course, is a little-disguised reference to the House of Saud, since the end of oil would likely mean the end of the Saudi kingdom, too.

A Call for Control

But even though the Saudis want a meeting for their own, easily discernable reasons, the oil-consuming world should have a wholly different agenda when its representatives get there.

For one thing, it’s high time that oil consumers start exerting a little pressure of their own, and a meeting like the one Saudi Arabia has set up would be an ideal venue.

You see, we’ve closely studied the entire issue of Saudi Arabia’s questionable oil-reserve-claims in the past – obviously with little cooperation. So this summit now emerges as an opportunity to ask – in an in-person and point-blank manner – just how much oil remains in the ground. We would also ask – just as bluntly – why Saudi Arabia and its OPEC cronies have repeatedly promised to raise global output to stave off higher oil prices. Yet, for some strange reason, they’ve never done so.

Starting in 2005, the world’s oil output mysteriously plateaued at 85 million barrels a day.

It’s probably not that oil producers don’t want to increase production; I don’t think that they can.

Are We Nearing Oil’s “Twilight” Zone?

Most experts who examine the numbers have finally concluded that something’s not quite right when it comes to the reserve calculations. In fact, many of these experts – including myself – openly question the figures, and have done so for years.

Some, like noted author, Matthew R. Simmons, author of the best seller “Twilight in the Desert,” take it a step further and state that Saudi Arabia has been deliberately overstating its reserve capabilities for decades.

And that really gets us to the heart of this whole controversy: Nobody really knows what Saudi Arabia or any of the other OPEC members have “in the ground.”

In my exclusive interview with Jim Rogers in Singapore earlier this year, the global investing guru really put things in perspective with regards to the Saudis’ oil reserves when he said that “either you believe them, or you don’t,” because they’re certainly not going to disclose what’s actually in their oil fields, nor are they prone to allow open inspections.

We’re betting that the Saudis have simply become accustomed to high revenues and rapid economic growth, meaning they have no interest at all in seeing crude prices decline.

So don’t expect any self-inflicted wounds.

Even Saudi King Abdullah’s statements to the U.N. secretary general earlier this week were nothing more than “positioning.” Even with an output of 9.7 million barrels a day – which represents the increase of 200,000 barrels per day that we mentioned a moment ago – Saudi Arabia’s boost to production is all show, and no substance.

In the long run, it doesn’t matter anyway. The world’s supply of oil is destined to run out. The only questions are when – and at what cost.

You see, either the world will use the last drop of oil, and descend into chaos, or before that happens will discover a substitute (or, more accurately, several alternatives), in which case Saudi Arabia will watch as its wealth and its position of power are both undermined.

And the Saudi leaders know it.

Until that happens, it’s very much in that country’s interest to do all it can to perpetuate the myth that it is doing all it can to stabilize – or even reduce – oil prices by calling for production increases, like the one revealed yesterday, or summits, like the one set for Sunday.

But just understand that these are merely “feel-good” moves – and nothing more.

History suggests that any political cadre will put self-preservation ahead of everything else. And this is no different.

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News and Related Story Notes:

• Reuters:
    Global Markets: Oil Surges to New Record, Pushing Down the Dollar.

• Bloomberg News:
  
  Oil Falls for a Second Day as Saudi Arabia May Increase Output.

• CNNMoney.com:
  
  Saudi Arabia seeks oil price curb.

• Money Morning News Analysis:
  Oil "Bulls" its Way Above $139 on its Way to a New Record as the U.S. Dollar Resumes its Descent.

• Wikipedia:
  House of Saud.

• Money Morning News Analysis:
  Saudi Arabia Agrees to Increase Oil Output After Crude Hits Another New High.

• Money Morning Exclusive Interview:
  
  Jim Rogers: China’s Economic Advance is All But Unstoppable.

Saudi Arabia, the world’s biggest oil exporter, is considering joining its Middle East peers by setting up a sovereign wealth fund (SWF) with an initial investment of about $6 billion, Mohammad al-Jasser, vice governor of Saudi Arabia’s central bank, said. 

The vice governor didn’t reveal many specifics of the plan, but he told Bloomberg that the relatively low starting amount is designed to avoid political backlash and fear from the country’s many alliances – from Western oil consumers such as the United States to its oil-producing neighbors that already wield sizable SWFs of their own.

"There’s too much populist bias now against emerging market sovereign wealth funds," Al-Jassar said.

However, this façade of diplomacy veils the fact that the Saudi Arabian royal family controls a good portion of many of the country’s largest companies. And those companies – like many around the world – diversify their equity reserves by buying international stocks, bonds, ETFs, etc.

The best example is Saudi Basic Industries Corp. – the country’s largest public company – which is 70% owned by the government. In May, the "company" bought the plastics’ division of General Electric Co. (GE) for $11.6 billion.

That wasn’t the only big SWF purchase last year. Middle East SWFs generated a steady stream of news coverage last year, as the government-controlled bankrolls grabbed sizable stakes in blue-chip companies around the world:

• Nov. 27: Abu Dhabi pours $7.5 billion into ailing Citigroup Inc. (C). 

• Nov. 26: Dubai International Capital, a state-owned holding company, acquired an undisclosed stake in Japan’s electronics and media juggernaut Sony Corp. (SNE).

• Nov. 16: Abu Dhabi invested $622 million (an 8.1% stake) in California-based microchip-maker Advanced Micro Devices Inc. (AMD).  

• Oct. 20: Dubai International Capital agreed to invest $1.26 billion in the initial public offering of hedge fund Och-Ziff Capital Management Group LLC (OZM).

• Aug. 22: Dubai World, another investment arm of the state, plunked down $5.1 billion for a 9.5% stake in MGM Mirage (MGM).  

• Aug. 14: Istithmar, part of Dubai World, was cleared to buy Barneys New York Inc. for $942.3 million from Jones Apparel Group Inc. (JNY).

Kuwait Signals Interest in European Banks

The next big-name fund to join the fray is the $250 billion Kuwait Investment Authority, the oldest SWF in the world, which said it would like to buy stakes in capital-starved European banks currently beat down by mortgage losses, Bloomberg reported.

"We are interested if we are invited" to invest, Bader al-Saad, the fund’s diplomatic managing director, told reporters at the World Economic Forum in Davos, Switzerland, remaining just as mindful of public relations as Saudi Arabia’s al-Jasser. 

Kuwait’s SWF has already invested in U.S. banks with a $3 billion investment in Citigroup and a $2 billion investment in Merrill Lynch & Co. (MER). 

Analysts aren’t expecting a slow down of SWF spending sprees in 2008. On top of more spending from Middle Eastern SWFs, India is taking steps to launch its own SWF. And China just finished taking applications from more than 100 drooling money managers to help invest the country’s $200 billion SWF, China Investment Corp. 

And let’s not forget a wild card, Norway, whose government controls the second-largest SWF in the world, the $350 billion Government Pension Fund of Norway. However, this company may be the exception, as it refuses to invest in companies such as The Boeing Co. (BA) and Wal-Mart Stores, Inc. (WMT) that violate its ethical standards of nuclear weapons production and human rights, respectively. 

News and Related Story Links:

• Bloomberg:
  Saudi Arabia Plans Its First Sovereign Wealth Fund

• Money Morning:
  Sovereign Wealth Funds Biting into the World’s Biggest Companies…Transparency and Motives in Question

• Bloomberg:
  Kuwait Sovereign Fund Seeks Stakes in European Banks

• Money Morning:
  Surging Demand and a Nationwide Shortage: Why India Wants Coal for Christmas

• Money Morning:
  Investment Advisors Angle for Chance to Manage China’s $200 Billion Sovereign Wealth Fund

• Wikipedia: 
  Government Pension Fund of Norway

In yet another example of the growing global importance of state-run investment pools, Saudi Arabia said it’s establishing a sovereign-wealth fund that will eclipse Abu Dhabi’s $900 billion venture to become the largest in the world.

As the new "King of the Cash Barons" coterie, the state-controlled Saudi investment pool will be positioned as a major rival to other government-run venture funds currently controlled by cash-rich nations in Asia and the Middle East.

As Money Morning has chronicled in a series of reports, these funds increasingly have been capitalizing on the widespread fallout from the U.S. housing meltdown and the associated subprime mortgage crisis – and using the market weakness to buy big stakes in such struggling financial giants as Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS).

In many of the cases – Citigroup being an excellent example – the sovereign funds have snapped up prime U.S. assets with terrific long-term futures at near-term bargain prices.

Many of these "Cash Barons" are looking for more than just an investment return: They are looking for the deal-making know-how that will enable them to one day usurp Wall Street as the deal-making Mecca of the capitalist world.

It could happen.

Sovereign-wealth funds currently control more than $3 trillion. The International Monetary Fund (IMF) and other experts predict the state-run venture funds could control $12 trillion by 2015. Money Morning Investment Director Keith Fitz-Gerald estimates that the total capital under the control of the global Cash Barons will be more in the region of $20 trillion by the middle of the next decade.

No matter which estimate proves the most accurate, it’s clear the state-run funds will be major financial forces in the world economy in just a few short years. For some context, consider that the estimated U.S. gross domestic product for 2006 was slightly more than $13 trillion.

The Saudi’s new sovereign-wealth venture will probably be created and managed by the Saudi Arabia Public Investment Fund, which up until now has been limited to internal investments, The Financial Times reported. Previously, that country’s oil-generated wealth had been apportioned among the Saudi kingdom’s central bank, Saudi Arabian Monetary Agency, also known as SAMA, and partly into the personal coffers of the nation’s ruling family, the international financial newspaper reported.

This new fund will represent a major shift in the investment policy of SAMA, which, up to now, had been limited to conservative stocks and bonds, especially U.S. Treasuries.

Interestingly, while SAMA’s balance sheet is public information, banking-sector insiders in the region say that those figures portray only a sliver of Saudi Arabia’s actual wealth. The reason: The royal family has stakes in scores of investment vehicles, most of which are not known.

Contrast that with Saudi Arabia’s Persian Gulf peers, which have increasingly shifted their investment strategies to prepare for the day when the region’s oil reserves run dry: These other countries have been investing in such alternative investments as high-risk hedge funds and other alternative investments. What’s more, as recent news reports underscore, these venture funds are increasingly taking direct stakes in major corporations – especially financial-service firms.

Unlike its peers in the Gulf, Saudi Arabia has expanded its spending and its budget for 2008 includes spending for important infrastructure projects, the Financial Times reported.

In addition to the Abu Dhabi Investment Authority, some of the world’s top sovereign wealth funds include Singapore’s Temasek Holdings Pte. Ltd. and Government of Singapore Investment Corp., Mainland China’s China Investment Corp., and Dubai’s Dubai International Corp.

India also is looking to start a sovereign fund of its own.

News and Related Story Links:

• Zawya.com/The Financial Times:
  Saudis Plan Huge Sovereign Fund Body.

• Money Morning News Analysis:
  Merrill Lynch is the Latest Beneficiary of Global "Cash Barons" Move on U.S. Financial Services Sector.

• Money Morning Investment Analysis:
  Citigroup: Why This Turnaround Play Has Legs – Big Ones.

• Zawya.com:
  Saudi Arabia Public Investment Fund.

• Money Morning News Analysis:
  Fang-Temasek Partnership the Latest in a String of High-Profile Sovereign Wealth Deals.

• Zawya.com:
  Saudi Arabia Monetary Agency.

• Money Morning News:
  Cash Infusion Brightens Morgan Stanley’s Dismal Fourth Quarter.

• Money Morning News Analysis:
  Surging Demand and a Nationwide Shortage: Why India Wants Coal for Christmas.

From Staff Reports

Royal Dutch Shell PLC (RDS.A RDS.B) and Saudi Arabia’s Saudi Aramco have announced the $7 billion expansion of a refinery in Port Arthur, Tex., which will make it the largest facility in the United States, according to Forbes.com.

The refinery’s output will be beefed up from 275,000 barrels of crude per day all the way up to 600,000 barrels. The project is scheduled for completion by 2010. It will cost an estimated $7 billion, which is more than double last year’s estimate.

The two oil giants will share the cost as part of their joint venture, Motiva, headquartered in Houston. Motiva operates two other refineries in Louisiana. The company supplies approximately 7,700 Shell-branded retail outlets in the Gulf and East Coast regions.