In 2009, 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?
Nice to meet you, but don’t expect cheap oil. (Saudi Press Agency via Reuters) 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 of at least $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.
So although it’s always risky to guess where oil prices are heading, countries such as Saudi Arabia have ample reason to target $100 per barrel, even though the global economy’s still weak and demand is slackening. (OPEC can try to prop up prices by curtailing supply, although there’s always the possibility that some countries will cheat.) And, as I detailed in this post over the weekend, as long as the United States remains so reliant on gasoline, those persistently high prices could bite into growth and dampen the nascent economic recovery we’re now seeing.
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