Saudi Arabia dictates the new minimum oil price: $100 per barrel
Saudi Arabia now needs a minimum oil price of $100 to cover its government spending. If the oil price falls below $100, the Saudis will lower their overall oil production in order to push up prices.
In my book “Don´t toil – trade oil”, I introduced the concept of a floor price for crude oil. A floor price is a minimum price for the commodity. I distinguished between a technical floor price and an economic floor price. The technical floor price is the cost of producing the oil, e.g. about $45 for a barrel of crude from deepwater production.
The economic floor price is the minimum oil price Saudi Arabia needs to cover its spending. If the oil price falls below this price, the Saudis will shut down some wells in order to push up the price of oil. As the second biggest oil producer (Russia is still number one) and the only oil producer with some spare capacity, the Saudis can lower their production by 1mb/d or even more if necessary.
Why no one needs to pay attention to its decisions any more
OPEC members ignore the cartel´s decisions.
OPEC is deeply divided while any decision has to be unanimous.
Only Saudi Arabia has spare capacity left to move the market.
The last two OPEC meetings in June and December 2011 showed that the cartel no longer playsan active role in shaping the world.
At the first meeting in June, Saudi Arabia wanted to raise production quotas in order to boost oil production. The goal was to lower global oil prices. Even as OPEC members set production quotas and a price band between $70 and $80 back in 2008, member states simply ignored the allocated production quota and produced as much as possible. Saudi Arabia was just the exception, retaining some spare capacity. Prices had risen to $117, far away from OPEC´s target price.
So everyone expected OPEC to raise production quotas in order to adjust its policy to reality.
The meeting ended without any agreement. Saudi Arabia, Kuwait and the UAE wanted to increase production, the rest of the cartel didn´t. So the hawks (Iran, Venezuela) defeated the doves (e.g. Saudi Arabia). The Saudis decided to ignore OPEC altogether and increased their crude oil production to keep the market supplied.
The December meeting was different. Continue reading