Yesterday, King Abdullah’s comments in Kuwait that $75 per barrel seemed a reasonable price for oil touched off a mini-firestorm among gasoline-consuming bloggers in the West. Why, the bloggers asked, was Saudi Arabia looking for a price around 50% higher than its own costs to produce oil? Clearly, this was intended to screw the West and find funding for ‘global jihad’.

Today, Saudi Oil Ministry Ali Al-Naimi gives an answer, as reported by Reuters and published in Asharq Alawsat: Because oil production is a global enterprise, prices cannot be based on the lowest production costs, but more aptly on the cost of bringing new oil into production. A price of $75/bbl, he said, represents the margin cost of producing oil, what it would cost to bring a barrel of, say, Canadian oil derived from oil shales. This, he says, would be the ‘fair’ price.

Whether that price is even attainable in today’s markets is an entirely different matter, of course. It seems that oil is reaching its own price now, around $50/bbl, when speculation can tweak the price slightly higher. Major production cuts by OPEC could push the prices considerably higher, but that would still create problems for certain countries—as Libya, Venezuela, and Iran—who have created budgets based on prices of $130+.

Saudi Targets “Fair” Oil Price at $75

CAIRO (Reuters) – Saudi Arabia on Saturday cited $75 a barrel as a “fair price” for oil, the first time in years that the world’s biggest exporter has identified a target for crude prices.

Saudi Oil Minister Ali al-Naimi said oil prices needed to return to $75 to keep the more expensive new projects at the margins of world supply on track. His comments may come as a relief to consumer nations fearful of a return to $100-plus oil. U.S. crude was valued at $55 late on Friday.

“There is a good logic for $75 a barrel,” Saudi Oil Minister Ali al-Naimi, OPEC’s most influential voice, told reporters in Cairo, where the producer cartel was meeting.

“You know why? Because I believe $75 is the price for the marginal producer. If the world needs supply from all sources, we need to protect the price for them. I think $75 is a fair price,” he said.

Saudi King Abdullah announced $75 as a fair price in an interview with Kuwaiti newspaper Al-Seyassah.

Naimi’s comments stopped far short of suggesting OPEC adopt a new formal price target to guide policy. But the unexpected break from his customary refusal to cite any sort of preferred price will give markets a new reference point when world oil demand recovers from the current recessionary slump.

For the time being $75 is out of reach.

Without tougher cartel action following two rounds of output curbs that have failed to rally prices, some OPEC delegates question the strategy for getting back to $75.
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