During the week the Saudi Arabia petroleum and mineral resources minister Ali Naimi said he couldn’t understand why oil prices are so high.
‘I think high prices are unjustified today [on] a supply-demand basis. We really don’t understand why the prices are behaving the way they are’ he told the Financial Times.
According to Naimi supply of oil is much stronger than when oil prices peaked at $147 per barrel back in 2008. He’s even suggested that if needed the Saudis could increase output as much as 25%. In order to lower the price.
Currently the Saudis have an extra production capacity of 2.5 million barrels per day (mbpd). This potential is an addition to their 9.9 mbpd output.
Naimi said if his kingdom could reduce oil prices by exporting more it would.
However Naimi’s customers aren’t ‘…asking for additional crude. “We are ready and willing to put more oil on the market buy you need a buyer.”‘
Right now there isn’t a buyer for extra crude.
Oil consumption in America is at its lowest since 1997. And production is at its highest since 1993.
While high energy prices are becoming a drain on the US consumer they’re affecting other developed nations.
On Tuesday Christine Lagarde managing director of the International Monetary Fund highlighted the danger of rising oil prices. Saying increasing prices were a bigger worry for the global economy than Europe’s sovereign debt crisis.
So why isn’t the Arab nation rubbing its hands together over higher oil prices? And why would the oil minister even suggest lowering the price of crude?
In a letter written to the Financial Times Naimi offers some insight into why he believes crude prices need to drop.
‘It is clear that sustained high prices are starting to take their toll on European economic growth targets… No one benefits from a stagnating European economy and we want to do what we can to help encourage growth… We want to see stronger European growth and realise that reasonable crude oil prices are key to this…’
The thing is the Saudi ‘break-even’ oil price is $80 per barrel. And even though Brent crude prices are $45 a barrel above that the minister understands how easily the market can crash.
Saudi Arabia posted a record surplus of $149 billion in 2008 thanks to oil nearly reaching $150 per barrel… followed by a $12 billion deficit in 2009 after the crude price crashed to $40 a barrel.
Even after the country had a $20 billion surplus in 2010 it was only because oil hovered above $80 a barrel. During this time the break-even price for oil was $57 per barrel.
And here’s the thing. Saudi Arabia has committed to an awful lot of spending this year.
There’s the $100 billion committed to build 16 nuclear power plants over the next few years. Just over $64 billion towards housing on the outskirts of Jeddah. $45 billion is going into youth education. And another $23 billion is going to health care and infrastructure. On top of that is a rail link development between the kingdom’s two holy cities Mecca and Medina.
Should the oil price fall below $78 per barrel… the Saudi government would either have to cut back in spending or face a deficit for this fiscal year.
It’s because of the massive spending the royals have planned the oil minister is keen to see a stable and more importantly sustainable oil price.
As Naimi said higher energy prices threaten a European recovery. And a failing Europe threatens his country’s plans.
By S. Smith