Saudis Shift Toward Letting OPEC Aim Higher
Published: January 28, 2005
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.
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