Saudi handouts ratchet up “fair price” of oil
By Una Galani
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
DUBAI — Saudi Arabia’s rulers have long thought they could tell what a “fair” oil price should be. Prior to the heightening unrest on its own borders, the Kingdom reiterated its long-held view that this was somewhere between $70 and $80 per barrel. But the recent pledge for a massive boost to spending on everything from housing to religious police is pushing Saudi into its largest budget spending. No wonder the Kingdom now thinks the market is “oversupplied”. “Fair” looks set to become more expensive.
The Kingdom will need an average oil price of between $80 to just over $90 per barrel to balance its budget during 2011, according to various estimates. This is one of the highest breakeven prices within the bloc of six Gulf nations, up from previous forecasts of around $60 to $70 per barrel.
Of course, supply disruptions in Libya — which produces a type of sweet crude that the Kingdom cannot easily replace — and the threat of similar problems erupting elsewhere have pushed prices well above Saudi’s needs to around $123 per barrel for Brent crude and $109 for WTI.
It is not in Saudi’s interests to keep prices so high that they threaten the global economy, irk Western allies, and provide incentives for developing alternative fuels. But if higher spending becomes a new norm and Saudi wants to avoid taking on new debt or eating into its foreign reserves, then the Kingdom clearly needs to adjust its view of what is sees as fair.
The previous margin between Saudi’s breakeven requirements and its stated price target, suggests that the Kingdom might now consider a fair price to be closer to $90 to $100 per barrel. But even if spending comes down in the future, higher price expectations will be supported by another domestic factor: the Kingdom’s explosive growth in domestic oil consumption which Banque Saudi Fransi estimates has grown 27 percent since 2007.
Speculation has long-swirled about the longevity of Saudi’s oil reserves. Record spending and the Kingdom’s own oil consumption — which according to some estimates amounts to about 15 percent of its production — suggests that Saudi’s domestic issues will probably force it to shift its consideration of what it deems “fair” nearer to $100 per barrel. Consumer countries better take note.