Saudis Shift Toward Letting OPEC Aim Higher
By JAD MOUAWAD
Over the last year, Saudi Arabia has quietly endorsed a shift in strategy that was once championed by only a handful of OPEC's more radical members, like Iran or Venezuela, who were pushing for prices higher than those of the last two decades.
Instead of enforcing what has been OPEC's official policy since March 2000 and defending prices of $22 to $28 a barrel, Saudi Arabia, the group's most powerful member, has acted to nudge the group's reference price closer to $40 a barrel. Along the way, OPEC has grown increasingly fond of high prices, with crude oil trading near last year's records.
While the century-old oil industry has been through a number of boom-and-bust cycles before, OPEC's strategy carries risks. For consuming nations, high oil prices could derail economic growth and plunge the world into lasting recession; for producers, it could mean lower demand for their commodity in the long run as consumers shift to alternative fuels or promote energy-conservation policies.
The shift by the Saudis adds to their uneasy relations with the United States. Based for more than half a century on cheap oil in exchange for security, those relations have not recovered from the aftermath of the terrorist attacks on Sept. 11, 2001.
It also underlines a belief that after the oil shocks of the late 1970's and 1980's, modern economies can better withstand higher oil prices than in the past.
"My view is the world is not suffering, as far as economic growth is concerned, from where prices are today," Ali al-Naimi, Saudi Arabia's oil minister, told Reuters at the World Economic Forum in Davos yesterday. "The price today doesn't seem to be affecting economic growth negatively, and we do not want it to."
OPEC's approach will be discussed this weekend when the Organization of the Petroleum Exporting Countries meets in Vienna to consider whether cuts in production are warranted to fend off a slowdown in demand in the second quarter.
Many OPEC oil ministers, like the current president, Sheik Ahmad al-Fahd al-Sabah of Kuwait, indicated recently that they would leave production unchanged. They estimate that keeping the current level of 27 million barrels a day will not cause prices to fall.
OPEC's policy shift has yet to be made public, but it coincides with an emerging consensus among analysts, traders, and oil companies that prices will be substantially higher in the coming decade than the average of $20 a barrel in the 1990's.
At a time when prices already seem high, oil-producing countries need additional revenue to deal with social and economic problems at home; many have young and rapidly growing populations, with high unemployment and rising public debt. That explains why Saudi Arabia is shifting away from its previous view.
Nordine Ait-Laoussine, a former OPEC secretary general and oil minister from Algeria who now heads a consultancy in Geneva, said, "I don't know if Saudi Arabia has become a price hawk, but for sure, it isn't a price dove anymore."
Last year, OPEC's 11 members - Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela - received $338 billion in revenue from oil exports, a 42 percent increase from 2003, according to figures compiled by the federal Energy Information Administration. That agency, part of the United States Department of Energy, forecast a 2 percent increase in OPEC revenue for 2005.
Adjusting for inflation and population growth, OPEC's revenue per capita dropped to $600 in 2004, from a high of $1,800 in 1980. For Saudi Arabia, where the population has more than doubled in the last 25 years, per capita revenue has dropped from $22,000 in 1980 to $4,000 last year. "They have higher revenue needs because they have higher spending, especially on security or social services," said Lowell Feld, the senior world oil market analyst with the Energy Information Administration, who compiled the figures.
Paul Horsnell, director of energy research at Barclays Capital in London, said: "What OPEC is going through is a delicate choreography. Everyone recognizes that $20 a barrel is too low a price. All OPEC is doing now is accompanying where the market sees prices going in the future. But there's nothing terribly explicit about it."
When they met in December in Cairo, OPEC ministers were jolted into action by rapidly falling prices. Within weeks, oil traded in New York had tumbled from its $55 a barrel high in October to around $40 a barrel as the group met. OPEC, which supplies a third of the world's oil production and half of the exports, decided to trim its output by one million barrels a day, or 4 percent, to stem the slide.
The strategy worked as prices rebounded. Crude oil futures in New York are up 15 percent since the beginning of the year. On Thursday, crude oil closed at $48.84 a barrel, up 6 cents, on the New York Mercantile Exchange.
"OPEC's actions speak louder than their words," said Lawrence J. Goldstein, president of the PIRA Energy Group, an oil consultancy in New York. "It was not so long ago that Saudi Arabia mentioned $25 as a fair price. But they seem to have dramatically shifted their price to $35 a barrel. They won't admit it because that would have enormous political consequences."
Because transactions on the oil market are priced in dollars, the currency depreciation in the last two years has been one of OPEC's main concerns and a central argument in favor of higher oil prices.
In its last monthly report before Sunday's meeting, OPEC highlighted that issue again. The report said that the benchmark was worth $23.50 if adjusted for inflation and currency fluctuations. That would put it at the low end of OPEC's current price range.
"Their reference price is the OPEC basket and what that represents in terms of purchasing power for them," said Vera de Ladoucette, an analyst with Cambridge Energy Research Associates, an oil consultancy in Paris. "Their alarm bell is $35 for the basket."
To be sure, OPEC alone is not responsible for high prices. Since the beginning of 2002, when the current rally started, a series of unconnected events conspired to push prices up - the war in Iraq, production disruptions in Nigeria, strikes by oil workers in Venezuela and Norway, hardball politics in Russia and a hurricane in the Gulf of Mexico named Ivan.
Still, Saudi officials repeat that their government's policy is to keep oil markets well supplied, not rationed. Crown Prince Abdullah, who has been governing Saudi Arabia since King Fahd suffered a stroke in 1995, said in August that he favored oil prices of $25 to $30 a barrel.
The kingdom took steps last year to nudge prices down, stepping up production to some 10 million barrels a day and accelerating its program to add production capacity.
"Saudi Arabia has concluded that for the first time since the 1970's, an overall expansion in production capacity is justified," Brad Bourland, the chief economist for the Samba Financial Group in Riyadh, wrote in a recent report. He said that Saudi Arabia had increased its capacity to 11 million barrels a day, with the addition of two new fields, Abu Sa'fah and Qatif, and is starting 2005 with excess capacity of about two million barrels a day.
But Saudi officials remain evasive on a timetable for raising capacity. That issue is reflected in the debate over Saudi Arabia's pivotal role in the oil market, according to the Center for Global Energy Studies, a market analysis group.
"Boosting capacity risks undermining oil prices and with them, the kingdom's oil export revenue," the group, founded by Sheikh Ahmed Zaki Yamani, the Saudi oil minister for much of the 1970's and 1980's, said this week. "Better, then, to save the money and seek higher prices, especially as these higher prices show little sign in the short term of undermining global oil demand."
Prudent Investor says...
Bye bye cheap oil!
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