The Price Isn’t Right

Over at the Wall Street Journal, reporter Neil King Jr details the internal debates in Saudi Arabia over oil production. With the price now skyrocketing past $140 dollars a barrel, some Saudi officials are starting to sweat.

Intuitively, you’d think it would be the opposite. Higher prices lead to greater revenue, right? Yet historically, Saudi Arabia has been the leader of the OPEC block pushing for mid-range oil prices. They have resisted driving the price through the roof, much to the irritation of oil-producers like Iran. There are a few reasons for this. Back in the 1970s, during the Arab oil embargo, the Saudis began to notice that the effects of high oil prices – much celebrated amongst OPEC states – were not entirely positive. Exploration by non-OPEC countries began to occur in places like the North Sea, a development that would soon cut into the Saudis’ market share; moreover, investment in alternative fuels rose.

Just as it occurred in the mid-1970s, the same thing is happening today. Oil companies are looking wildly for new reserves to tap into (think ANWR) and research into alternative energy sources has apparently jumped some 60% in the past year alone. In oil-importing states, there is also more talk about conserving energy and switching to fuel-efficient technologies. None of this is in the Saudis’ long-term interest. If prices were to remain steadier, they figure, many of these outcomes could be delayed for years to come. Moreover, Riyadh worries that high prices will undercut the United States’ economy – and, by extension, their own. The country’s foreign holdings, totaling billions of dollars, would also be hit hard.

Then there’s Iran. Higher prices give their regional rival a huge boost. During the Iran-Iraq war, the Saudis (allied with Saddam) worked to keep Iran low on cash by ensuring that OPEC’s production remained high. The same fear holds now; with an expansionist and rising Shiite neighbor, the Saudis are quietly trying to keep the lid on the region’s shifting power balance. With a stumbling President Ahmadinejad, tightening the screw on oil prices would lead to domestic troubles for Tehran, and would also undercut the country’s aggressive foreign policy agenda.

Their problem, however, is that there’s only so many extra barrels that they can put onto the market. Over the last few weeks, the Saudis have agreed to increase production by about 500k barrels. Yet a lot of the new supply consists of heavier oils, for which there is less demand. For now, at least, the Saudis may be stuck with skyrocketing prices like the rest of us. Whether they like it or not.

Author: JEB KOOGLER

6 Comments

  1. They should sweat. If the USA adopts a drilling policy in 10 years oil will be 50 bucks a bbl again and gasoline will be 2 bucks a gallon or mabey less.

    People are going to have to get off this high horse and let the drilling begin IN conjunction with other programs to reduce the World, just not America but the worlds need for oil.

    The Saudis see the handwritting on the wall. The world cannot stand this huge oil prices for long and in the long run it will force the world to do something about it which will affect their bottom line.

  2. how about a cite, neo? The US doesn't have the reserves to drive the price drop you claim.

  3. “Higher prices lead to greater revenue, right?”

    “Always,” the same belief some hold about taxes.

  4. http://www.usgs.gov/newsroom/article.asp?ID=1911

    U.S. Geological Survey – 1980. In 1980, the U.S. Geological Survey estimated the Coastal Plain could contain up to 17 billion barrels of oil and 34 trillion cubic feet of natural gas.

    If oil companies tapped the 68 million federal acres of leased land it would generate an estimated 4.8 million barrels of oil a day – six times what the Arctic National Wildlife Refuge would produce at its peak, Pelosi said.

    17 billion bbls of oil in the outer reaches.

    “The fact is 80 percent of the oil available on the Outer Continental Shelf is in regions that are already open to leasing, but the oil companies haven't decided it's worth their time to drill there,” the speaker said.

    But lets assume that Pelosi is right. Perhaps the oil industry really does not want to drill this oil then how do we make them? How do we really increase oil production. While opposed to it in principal perhaps its time to nationalize our oil companies. They are a threat to our national security and economic viability if Pelosi is right.

    The reason we do not develop oil shell is because its expensive and uses tons of water. Perhaps a pipeline from the ocean to colorado is in order.

    If we do not get this right the world is going to slip into a depression. This is serious and it has nothing to do with the war in Iraq.

  5. Thanks, neo. the article does not support your $50 a barrel oil number, but I appreciate the response. The Dems have proposed a “use it or lose it” bill on leases, which could make companies either drill or give someone else a shot at it.

    As for oil shale, the west is in deep drought already and water rights already very contentious. I doubt any “technical” recovery of challenging oil deposits is going to happen any time soon, especially those with big water demands

    Our cheapest new energy is conservation, the very thing OPEC fears. Next is electricity. Charging an electric car or plug-in hybrid equates to about $0.75 per gallon. Point sources of pollution, like utilities, are easier to clean up. Plus, solar is perfect for charging your car while you're at work.

  6. Ultimately the high energy costs are our own fault. The US must implement policies such as conservation alternative energy sources, etc. to reduce our reliance on oil.

    The Saudis are right about the negative impact of higher oil prices, and the Iranian gains. I'm sure the Saudis (and others) are quite happy with prices where they are or even lower. They've already got a ton of money that they don't know what to do with….

    I also fear that Neocon is right about heading into a depression…. I'm not sure we'll get there, but I'm very pessimistic on the future, primarily because of high energy costs… I view it like flying on an airplane… you're flying fine, then you hit some mild turbulence, and at one point the plane hits a pocket of rough air and the plane drops unexpectedly…. Everyone on board is already on edge because of the turbulence, but the drop makes everyone on board really scares everyone… RIght now we're in the turbulence. This winter I think our economy will hit that drop and while most people will live, overall we will have lost a lot and some folks just won't survive… I'm not just referring to people unable to pay their energy bills, but of companies cutting jobs, and the higher prices of pretty much everything.

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