Saudi handouts ratchet up “fair price” of oil

April 18, 2011

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.

Comments

Dick Cheney misinformed the King as to how the theory of; “what the market will bear” works.”What the market will bear” on products of which are not the necessities of life, works just fine. It is a very good way to set prices with comparable products of (desire). When it comes to the necessities of life, if you use this theory to excess, you choke the consumer and when the consumer realize this high cost is from unnecessary greed and is probably a permanent price increase, the consumer will look for a more economically feasible and dependable product of replacement .Once this trusting supply relationship is damaged and the consumer looks for, and finds a economically feasible and dependable replacement, the consumer can now say to the supplier; now the monkey is on your back. At this time the consumer will have a new product economically feasible and a supply fulfillment to satisfy their needs for many years to come with his old supplier left to care for other customers.

Posted by ugg | Report as abusive
 

This was well written and very thought provoking.

So if all this price rise stays at elevated levels, maybe, maybe, finally, finally the USA will get their act together and change their dependency on oil. I’ve been waiting since the 70′s, when the USA first woke up to their
being dependent.

You said it, “…provide incentives for developing alternative fuels.”

Yippie!!! The world environment thanks the Saudi’s!

Posted by limapie | Report as abusive
 

It’s just plain pathetic that one of the variables to determine a “fair price” has to depend on the Saudis unwillingness to rein their outrageous spending…

Posted by marusik | Report as abusive
 

When geothermal energy comes into its own, and when a new method of storing and transporting energy is developed the oil barons will have to take what they can get for lubricating oil and for operating oil power engines during their useful lives. It will happen, and the rush to raise prices will just hasten it along.

Posted by fred5407 | Report as abusive
 

re: blaming Federal Reserve vs. Saudis.

For obvious reasons, it’s politically feasible for western oil retailers, investors, and politicians to blame “the Arabs” in public. They did the same in 1973, when Kissinger used “shuttle diplomacy” to drive up prices. I’m no fan of Saudi religious police and cultural repression, but right wing religious kookery is another issue.

Several researchers (aka “conspiracy theorists” in today’s parlance) pointed out that crude oil is priced in New York and London, not in the Middle East. Note the price is based on the phantom Brent Sea Crude stock, not the Saudi-based sweet crude that is actually being produced and sold.

During the price spike of 2005-6, Antonia Juhasz pointed out that the world and the US in particular was facing a GLUT of oil supply, and William Engdahl estimated that 60% of the price was purely speculation in “paper” oil futures, although that could only be estimated because deregulation also eliminated transparency requirements in speculative “dark markets”. So the public was not permitted to have information on supply/demand. Accurate information is a fundamental requirement of ideal capitalism, vis Adam Smith.

It was confirmed that the actual oil market was slack, not tight, when Bush “asked” the Saudi leaders to pump more oil in exchange for nuclear technology (ironic, considering the Iran hysteria). Saudis publicly told Bush “No” in a kind of ambiguously-diffused statement that sophisticated western leaders use to coat slippery political talk, but basically stating “we’re already pumping enough to meet real market demand, your price issues ain’t our problem and we ain’t gonna fix your problem by pumping more oil into above-ground storage”.

Speaking of transparency and what “the President should do” about Fed policy, key players such as Geithner, Bernanke, and Greenspan have all stated in interviews that the President and Congress must have NO INPUT on Fed policies. Greenspan specifically said the President’s relationship with the Fed chief should be “Nothing”.

This argument goes back to the original Jekyll Island crew that formulated the Fed (due to citizen outrage over gold hoarding and the silver movement) specifically to separate financial policy from “politics” via a pseudo-govt agency. Of course, central bank policy *IS* political, but the point is that the general public must have no access to influencing US/global financial and economic policy decisions, particularly via democratically-elected officials. Instead, the private club of Wall Street/Washington bankers and their revolving-door experts must be allowed to make decisions in isolation from all public political pressures, other than the pressures of their key constituents, other private profiteers on Wall Street. That viewpoint has been clearly reiterated, several times since the 2007 meltdown.

So how’s that working out for everyone?

Posted by dilbert_g | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/