20 April 2012

Saudi Arabia Complacent in Age of Inflated Oil Prices

Saudi Arabia does not allow its oil to be traded, nor does it offer its oil without restrictions for resale. The kingdom only sells to final users -- that is, to refiners, who process the crude oil themselves. That means oil may be available, but will remain unsold if refiners do not have a demand for it. _ForeignPolicy
Saudi Arabia could do something about inflated oil prices, and the consequent demand destruction and economic suppression being seen in consumer nations. But there are potential hazards to the oil kingdom, in moving too aggressively to control world markets -- particularly at a time when OPEC is not the all-controlling force that it may once have been.
If Saudi Arabia allowed its crude to be traded -- that is, sold by the original buyer to some other final or intermediate client -- the abundant availability of Saudi oil would drive prices down. But the Saudis are afraid of playing an active role in the market... _FP
Too many bad things could happen to KSA due to the law of unintended consequences, should the kingdom move too aggressively to control prices.
Saudi Arabia's market share and revenues suffered as a result of OPEC's aggressive price setting policy that existed before 1985. In the years prior to that date, Saudi oil production collapsed from an all-time high of 10.3 million barrels per day to a minimum of 3.6 million, in the futile attempt to defend OPEC imposed prices. Ever since that experience, Saudi Arabia has refused to be tied to a rigid price target. _FP
Another unintended consequence of aggressive intervention by KSA could be an oil price crash. The history of global oil markets is cluttered by multiple boom-bust cycles, which proved ruinous to many oil producers over the years. OPEC has inserted some price stability into the picture but markets can be very spooky at times. Trying to control them too tightly can lead to unexpected repercussions.
As the revival of oil and gas production in North America and in other parts of the world gains strength, it will be in the interest of all to maintain prices at a level that is neither too low nor too high. A much lower price would nip the expansion of new sources in the bud, while higher prices could abort the fragile economic recovery. Saudi price targets, which lie in a band that hovers around $100 per barrel, are not out of line with the interests of the industrial countries. _FP
To be honest, no one truly wants to lower the price of oil. Instead, most people would like to profit from high oil prices. This is true for KSA, for Russia, for Canada, and for several US states and corporations.

High oil prices spur investment in new technologies of exploration, production, and substitution. A stable regime of high oil prices -- even at today's inflated levels -- may be the best thing to help bring about a more abundant, safer, and cleaner phase of global energy.

But stable energy prices are unlikely in the long run, since greedy, corrupt, and incompetent politicians can never keep their fingers off the golden eggs. As long as weasels such as Putin, Obama, Chavez, and the rest of the usual suspects rule the roost, we are more likely to see a fearful instability.

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