Washington is chiding Opec for pushing oil prices too high but top world exporter Saudi Arabia is happy to feed the price boom as long as rocketing US and Chinese demand proves consumers aren't bothered, analysts said on Friday.
Fresh from recording the highest annual average for two decades last year, oil has jumped another two dollars since Saudi Arabia this month orchestrated an Opec deal to bolster prices by cutting supply quotas four percent from April.
Prices are now back near post-Iraq war peaks, with US crude at $36 a barrel and Opec's own reference price three dollars above its $28 target ceiling.
That has set alarm bells ringing in the Bush administration, which fears the fallout of a further jump in energy costs during an election year.
"Obviously that (Opec) price concerns all of us. There's no question that higher energy prices have an impact on the economy," US Energy Secretary Spencer Abraham said on Thursday.
In previous years such a clear message from Washington would likely have elicited a speedy Saudi response to cool prices.
Not any more. Growing Opec confidence that rising Chinese demand will enhance Opec's ability to hold up international prices - as well as post-9/11 damage to the US-Saudi relationship - means Riyadh is prepared to test the higher ground to see how much consumers can withstand.
"They want to test how high prices can go before you start to see an impact on supply and demand that would really hurt Opec. A drip, drip, drip increase in prices is better than a sudden shock," said Adam Sieminski of Deutsche Bank in London.
"The perception is that $32-35 a barrel is affordable," said Roger Diwan of PFC Energy in Washington D.C.
So what of the rare public call before this month's Opec meeting by de facto Saudi leader Crown Prince Abdullah for "moderation" in oil prices? And Saudi Oil minister Ali al-Naimi's insistence that $25 a barrel is still Opec's target value?
"The Saudis are not totally comfortable at these levels but it's being driven by explosive growth in China and the United States which is still thriving even at these prices," said Paul Horsnell of Barclays Capital in London.
"$25 is still there, but it's more about a multi-year average and at the moment practical necessities are holding sway."
The dollar's slide in value over the past two years has also switched the goalposts. In euros, oil prices have been far cheaper. "It's pretty near 25 if you correct for the weakness in the dollar," said Sieminski.
The latest cut - a second surprise reduction in the last five months that Saudi Arabia has sprung on oil market speculators - underlined the kingdom's resolve to stop any downward price momentum before it started.
The West's own energy adviser the International Energy Agency gave Opec all the cover it needed for a cut by forecasting a towering surplus of oil in coming months as demand declines after the northern winter. "That made it politically fireproof," said Barclays Horsnell. "The Saudis are signalling that whatever they need to take off the market to defend the price they are prepared to do it. They are more worried about falls than rises, which skews the risk to the upside."
"The Saudis used to guarantee security of supply and a low price. Now, it is just security," said PFC's Diwan.
Fellow Opec members are so far happy to toe the Saudi line if it means strong prices, even though producers like Nigeria, Algeria and Libya are eager to raise quotas rather than cut them as they bring new capacity online.
And heady US fuel demand - rising to near record levels of 21 million barrels daily this month - suggests that five years into oil's price boom consumers have come to see current costs as the norm and are prepared to pay up.
Opec can look forward to the now-familiar prospect of a U.S summer gasoline price run-up to bolster prices across international markets as new environmental regulations kick in.
If US consumers do start to bridle at the high costs and cut back on consumption, then the Bush administration should find that the Saudis step in to moderate prices - just as they did last year by raising production during the Iraq war.
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