Saudi Arabia, through it’s Minister of Oil and Minerals Ali Al-Naimi, says the current price of oil is just about ideal. This is a $30/bbl higher price than what contented the Saudis three years ago, when they were saying $70/bbl – and meaning ‘around $50/bbl’.
Over the past three years, things have changed. First, of course, is that the Saudi government is committed to spending additional tens of billions of dollars on social welfare programs. That money has to come from the national treasury and the treasury is fed by oil sales. Second, international inflation – lead to some extent by high oil prices – is making everything more expensive. Third, there are strong moves against oil as a fuel of choice; alternative fuels, hybrid or all-electric vehicles, and the like soften the market so for the producers, higher prices will have to make up for lower volumes. Much of the world is still utterly dependent on oil, though, so this will add inflationary pressure.
Oil price of $100 per barrel is ideal: Al-Naimi
ARAB NEWSLONDON: The Kingdom favors an oil price of $100 per barrel, identifying an ideal crude price for the first time in more than three years.
It was revealed by the Minister of Petroleum and Mineral Resources Ali Al-Naimi in an interview with CNN. Al-Naimi also said the Kingdom could raise production to full capacity of 12.5 million barrels daily within 90 days.
“Our wish and hope is we can stabilize this oil price and keep it at a level around $100,” Al-Naimi said. International benchmark Brent crude was valued at just over $111 a barrel on Monday. US crude traded at $99.50 a barrel.
Al-Naimi said Riyadh could increase production by about 2 million barrels per day (bpd) “almost immediately.”
“We can easily get up to 11.4, 11.8 (million barrels a day) almost immediately, in a few days,” Al-Naimi told CNN — up from just under 10 million bpd now. But “to get to the next (700,000 barrels a day) or so, we probably need about 90 days,” he said.
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January:17:2012 - 16:42
Not clear why this should be “inflationary.” Presumably this is price at Ras Tanura, the value of which I do not know. But I expect it is not too far different than the Brent crude price, which is the main non-US price, which is currently above $100/barrel. Texas intermediate crude has been selling for somewhat less than that, an unusual situation, but this gap has been narrowing recently (see Econbrowser for discussion of what lies behind all that). In any case, the preferred Saudi price is not above the current world price, so is not inflationary.
January:17:2012 - 17:12
While the price is commensurate with global prices, Saudi costs to lift oil have historically been among the lowest. I recall lift costs of $2.50/bbl while the rest of the world was at $15-$20. This would mean that their oil is actually cheaper to produce than competitive products.
It is possible, though I’ve seen no figures to support it, that Saudi lifting costs have increased dramatically over the past few years.
The inflationary pressures are not because of Saudi acceptance of a new, $100/bbl baseline price, but because all oil has gotten expensive. That drives up the prices of all goods and services that need oil in any form, whether as fuel or feedstock. In other words, a rising tide of prices almost across the board.
With the Saudi ‘oil price dove’ now viewing $100/bbl as ‘normal’, the ‘hawks’ are going to be pushing for ever higher prices. Just the threat of that increases prices on the oil futures market, thus ratcheting the cost of things higher again.
January:17:2012 - 17:30
John,
Clearly you are not an economist, not to pick on you for that. However:
1) Saudi costs have indeed risen substantially above the old $2.50 per barrel range, with substantial extra efforts being made to maintain production in the northern part of the al-Ghawar pool, by far the world’s largest and most productive, producing on the order of 5% of world production, and about 5 times as much as the nearest competitor (Burgan in Kuwait). Not clear what the average current Saudi cost is, although that varies considerably across the pools and even parts of the pool, as with al-Ghawar.
2) The Saudis do not and never have sold at less than world prices. The difference between price and cost has been profit that has been the reason that they have been so fabulously wealthy for so long. Needless to say, as their costs rise, that profit declines, but they are still on average one of the lowest cost producers around.
3) The biggest threat to world oil prices is coming from the baseless move to economic sanctions against Iran for its perfectly legal uranium enrichment program under the NNPT, and the subsequent Iranian threat to close the Strait of Hormuz, which they are indeed militarily capable of doing, although very unlikely to do so as it would hurt them more than others. However, in the near term, goosing up the world price of oil with these threats helps offset their declining sales due to these unwarranted sanctions.
4) There is only an inflationary pressure if oil prices are rising and keep rising. If they are high, but steady, there is no inflationary pressure once the higher price works its way throughout the global economy, which the approximately $100+ Brent crude price did some time ago. So, again, no inflationary pressure at all from a steady $100 per barrel crude price.
January:17:2012 - 19:09
Thanks for your reply. No, I’m certainly not an economist, but I remember enough from those — OMG! 40 years ago!! — classes to follow you.
1. I’m glad to learn that Saudi production costs have risen. Not for them, but for the knowledge. I’m curious exactly what those prices are now;
2. Excepting long term contracts that fixed prices and contract discounts, Saudis have been selling at world prices. The exact terms of those contracts and discounts are not transparent, but I’m willing to stipulate that they’re not far off world prices;
3. The Iran issue(s) is today’s excuse for high oil future prices. Other excuses — and maybe even real causes — have been, as I noted, warfare in Nigeria. Add to that the health of
CesarHugo Chavez, Iraqi violence, Libyan uprisings, threats to the Suez Canal, etc., etc. The future market, as I also noted, seem to be spookier than Little Miss Muffet, but never seem to get their medications right enough to actually see prices come down substantially. They appear to be one-way ratchet.4. Yes, absolutely: stable prices are not inflationary. But, given the history and practice of the markets, can one say they’re actually stable? How long a period will we use to define ‘stable’? For me, I’d like to see prices remain level for, say, five years before we talk about stability. Right now, they’re anything but. Not as bad as a few years ago, perhaps, but prices still fluctuate by as much as $30/bbl over a two-month period.
January:18:2012 - 11:19
John
I very much doubt that a dead agricultural labour organiser – Cesar Chavez – has anything to do with current oil prices!
January:18:2012 - 11:37
Whoops! Thanks
January:18:2012 - 14:33
John,
On 2, I am sure some long term contracts are at prices not equal to current world ones, so they are not always selling at precisely current world prices at any particular time.
On 3, of course the future course of world oil prices are difficult to predict and have been volatile in the past, both up and down (remember the plunge from $147 per barrel in July 2008 to barely above $30 per barrel by the end of that year), with many factors involved. Another you did not mention but that is probably third after Iran’s threats and the problems in Nigeria is the current barely-reported-on conflicts in the oilfields in Kazakhstan that have led to a non-trivial number of people being killed during the past month.
3 and 4, there is no guarantee of stability ever, but I remind that prices can fall as well as rise. Indeed, the volatility goes both ways as 2008 is a reminder.