Why the Saudis want $100-a-barrel oil
In 2008, Saudi Arabia’s King Abdullah called $75-a-barrel oil a “fair price.” But the price of fairness seems to be rising fast: According to the Financial Times, the Saudis now prefer to keep oil prices at about $100 per barrel. What’s changed?
In a word, spending. Over the past few years, the Saudi government has taken advantage of sky-high crude prices to spend lavishly on public works and social programs to stave off the unrest that’s capsizing parts of the Middle East. As a result, the country now needs prices to stay above $80 per barrel to balance its budgets, up from $60 per barrel in 2008 and way, way up from $20 per barrel a decade ago. It’s a big shift in attitude: The Organization of the Petroleum Exporting Countries and other oil producers used to be wary of overly high prices — because, if oil got too costly, then countries such as the United States might start rooting around for alternatives.
It’s not just the Saudis, either. A 2011 report from the International Monetary Fund found that the “break-even” point for the world’s major oil producers has been rising at a shocking rate. Russia now needs crude prices at roughly $110 per barrel to shore up its finances. Iraq, Bahrain, Algeria, Iran and the United Arab Emirates all need prices between $80 and $100 per barrel. The lone exceptions, Qatar and Kuwait, can skate by with moderately lower prices, but even those countries have seen their break-even points creep upward in recent years.
It’s always risky to guess where oil prices are heading, but it’s notable that countries like Saudi Arabia have ample reason to try and keep prices high, even though the global economy’s still weak and demand is slackening thanks to slowdowns in Europe and China. The key question here is whether the Saudis actually has the ability to “target” prices in this fashion — a few OPEC members can try to shore up prices by curtailing production, the way they did after the financial crisis, though there’s always the possibility that members will cheat.
Either way, as detailed in this post over the weekend, as long as the United States remains so reliant on gasoline, persistently high prices are likely to bite into growth and dampen the nascent economic recovery we’re now seeing.