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The good, the bad, and the crude

21 Mar 2012 By Una Galani

Saudi Arabia can’t easily relieve Barack Obama’s fuel price misery. The kingdom’s assurances that it can and is willing to increase oil supply in the event of a shortage won’t do much to lower U.S. fuel prices, which are reaching risky levels ahead of presidential elections in November. In fact, the options for the world’s biggest oil supplier to rein in runaway crude are all imperfect.

One day after the Saudi cabinet, led by King Abdullah, pledged to bring back crude prices to fair levels, Ali al-Naimi, the oil minister, insisted that the kingdom can produce 12.5 million barrels per day of crude. That means it has 2.5 million barrels per day of spare capacity. But whatever the grandeur of that presentation, Saudi isn’t telling the world anything new.

Saudi oil is already pumping at near-historic highs. The country could afford to help its ally by pumping even more, depressing prices, at least until after the U.S. elections. The breakeven price for Saudi’s budget is estimated at around $75 per barrel by Riyadh-based Jadwa Investment. It projects that the kingdom is on track to generate a budget surplus this year of about 10 percent of GDP. And that’s based on predictions of Brent at $106 per barrel – compared to an average price of $119 so far this year.

But high oil prices are currently driven mostly by the rising tensions with Iran and Syria, not by a shortage of crude. Pumping more, thus eroding the world’s single biggest pool of spare capacity – in the absence of an actual supply disruption – could even add to price pressure. Oil traders get anxious when spare capacity is slim. It would also openly antagonise Iran, which has warned its Gulf neighbours of unpredictable consequences if they pump more to offset the current sanctions.

Saudi Arabia has always shown some concern about the state of the world economy and won’t want prices to stay high to the point that it shrinks demand among its main customers. But with few safe solutions to control prices, it has the cover to sit back for now and enjoy the financial and political spoils of the current situation; getting richer quicker while its regional foes grow weaker under a raft of international sanctions.


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