What Can the Saudis Do to Bring Down Oil Prices?

We all know that King Abdullah wears long flowing robes.  What we don’t know is what he’s got up his sleeves. 

Clearly the King wants to lower the price of oil, as discussed in my prior post.   How will he do it?  We know from the market’s action this week that it would be beyond stupid for the King to do no more on Sunday than announce another 200 kb/d of Saudi production, as has already been signaled to the market.  In terms of Saudi production, the King will need to commit to sell as much of the new 1.7 mb/d of light oil from their two new fields, Khurais, and Khursaniyah, as is needed to reduce the price of oil “substantially”.   I doubt the King will posit a target price. 

But we know that if the Saudis were to use all their spare capacity in an effort to reduce prices, its efforts would be unlikely to succeed.  For one thing, other exporting countries might well try to counter it by withholding more of their oil.  For another, if all the Kingdom’s spare capacity was used to reduce the price of oil… there would no longer be any spare capacity!  That would spook the market and the price of oil would actually go up.  Finally, within a year or so of the additional Saudi crude coming on the market, declining fields and new demand would still cause the price to rise.  Therefore, to bring down the price, the King will need to announce or propose something beyond just what the Saudis themselves can do. 

My favorite candidates for potentially effective longer term action to moderate the oil price would be the establishment of an international task force to work on increasing output from Nigeria and Iraq.  Why?  First, the only real potential near term upside for oil production is in those countries, each of which could add perhaps 2 mb/d to output in fairly short order if the above ground conditions allowed it.  Second, I think both countries’ leaders would like such an effort to succeed.  So maybe the King will suggest formation of two task forces composed of the Energy Secretaries from the U.S., Russia, E.U, and China plus local representatives of various factions of each country such as, in Nigeria, the Nigerian Energy Secretary, a person from the guerilla group MEND, executives of the oil companies, and the governor of the Nigerian Delta.  

The idea is that the task force would bring international pressure and expertise to bear on all sides and viewpoints continuously until a solution is reached.   If need be, the task force could arrange for U.N. troops to keep the peace that is negotiated.  In sum, the King would be asking that we all recognize the global imperative to get the world’s oil out of the ground faster in the near term or face economic collapse.  

The King could not get all this done by himself, but I think the King’s conference has been set up in collaboration with the White House and some other G-8s.   That suspicion was reinforced this morning by W’s personally “announcing” to the press his desire for Congress to authorize off-coast drilling.  It looked like an innocent enough announcement of a position the President is well known to have held for a long time (rumor is they were the first words out of his mouth as a child), but his press announcement so close to Sunday’s meeting and in the absence of any near term potential for Congressional action on the subject may have been intended primarily as a message of encouragement to the King that “we’re working with you.” 

I understand that the above idea positions me dangerously close to the “naive idealist” viewpoint.  I’m even willing to agree that my being right about this is a way long shot.  But it seems clear to me that if the King calls a big meeting to lower the price of oil and in the end he does not present a truly compelling set of reasons for oil traders to believe that the price should be lower, then the price will probably skyrocket instead.  And that would be somewhat of an embarrassment to the King, I would think.   So it seems impossible to believe that the King doesn’t have something really big up his sleeve. 

My own preference would be for someone in authority somewhere to pound the table for a rapid transition to electric cars, hybrid trucks, and more public transportation throughout the world.  But somehow I doubt that will come from King Abdullah. 

Comments

[ErnieMontague]

ELECTRIC cars and hybrid trucks. Good idea, as electricity grows on trees.

[BrianPursley]

Why would the Saudis want to bring down oil prices? They want to raise oil prices not bring them down.

www.ft.com/cms/s/0/5c9...

King Abdullah, the country’s ruler, put it more bluntly: “I keep no secret from you that, when there were some new finds, I told them, ‘No, leave it in the ground, with grace from God, our children need it’.’’

[Jack Yetiv]

I think today's announcement from China may help the King in his quest for lower oil prices. But as I have commented previously, I do not believe Saudi Arabia wants two-digit oil prices ever again.

With some demand destruction here and in other OECD countries, some moderation in increase in demand from the developing countries (eg, China announcement today), and an extra half million to a million bpd from Saudi Arabia, that combination may just be enough to keep oil in the low $100's ($110-120), a zone which the consuming countries will be thankful for (compared to projections of $150-200) and which the producing countries will be happy with.

A so-called "soft landing" of sorts.

Jack

[King ofSanity]

Jack:

I think the Saudis want to bring oil prices down to the $60.00 range. Their currency of choice is the dollar hands down. Also, they have way too much to lose with prices being grossly inflated as they are. They know very well that sooner than later, oil prices in the 3 digit range will create a severe recession like the world has never seen in just about every highly industrialized country on the planet. Most OPEC countries have very little to offer the world except the sale of their oil. What good will it do OPEC and other oil producing countries to have oil prices at $150.00 per barrel if no one can afford to buy it? Consuming countries can no more afford $120.00 per barrel compared to $150.00 for the long term with the end result of their entire economy being shredded to pieces. There needs to be some type of legislation in our country along with the other G-8 countries that puts the brakes to all of the speculators that could give a damn as to whether or not they destroy the economies throughout the world.


On Jun 19 08:51 PM Jack Yetiv wrote:

> I think today's announcement from China may help the King in his
> quest for lower oil prices. But as I have commented previously, I
> do not believe Saudi Arabia wants two-digit oil prices ever again.
>
>
> With some demand destruction here and in other OECD countries, some
> moderation in increase in demand from the developing countries (eg,
> China announcement today), and an extra half million to a million
> bpd from Saudi Arabia, that combination may just be enough to keep
> oil in the low $100's ($110-120), a zone which the consuming countries
> will be thankful for (compared to projections of $150-200) and which
> the producing countries will be happy with.
>
> A so-called "soft landing" of sorts.
>
> Jack

[Mufasa]

Jack, King of Sanity! You two have the most common sense statments I have heard. To cause a severe world recession would bring down the economies as you have said, but I think we have seen the last of $60.00 a barrel oil.

[onlytrusthim]

The king has some NEW oil finds. But remember that he also knows that his old wells have lost the ability to produce as much oil as in the past. Oil doesn't increase in production it decreases. We are lead to believe the kings oil will never run out . I believe this is another WMD fiasco. The USA and Canada have huge amounts of untapped oil, in fact Montana, N&S Dakota are drilling hot spots in the Bakken formation which are producing extremely well. Some of the companys BEXP, NOG, KOG, CLR and many more you can look up. We need alternative energy devices. I like CPST which has products in use in the real world.

[paulk8756]

Well done article. I also don't think it's coincidental the Chinese chose this particular moment to reduce their domestic subsidies.

As regards the Bakkens, I've been investing in those oil companies for several months now, and have been following events there closely. While it is true this may prove to be the largest single oil find EVER in N. America, there's a reason it hasn't been explored much commercially over the past 40 years.

That's because oil held there lays out at an average depth of about 20 feet (...some 2 miles down) over several hundred square miles. Although current extraction technologies can successfully pump the oil, it will require THOUSANDS of small wells to be drilled to remove significant amounts of this product.

[MarcusAurelius]

There are a number of reasons the Saudis may want to bring oil prices down. They need to eat and drink too, high energy costs are making it more expensive to do that.

Also, they want to avoid demand destruction. Right now energy prices have us here in the States doing more than just talking about getting off of oil (e.g. GM's minimizing its production of light/consumer trucks). If by some miracle we come up with a different & practical source of energy (e.g. If LS9's diesel excreting microbe pans out on a large scale) then Saudi is sitting on a worthless product. What then are they going to do to earn what they need?

If they pump it out too fast the future has nothing, hold onto to much of it the future may still have nothing but goo.

[howsie]

The Saudis think that we are saving our offshore and ANWR oil while their oil is being depleted. So, the king will say: you Americans better start to produce your own oil because we want to save ours for the future too; we're not dumb!!!