Saudi Arabia dictates the new minimum oil price: $100 per barrel
January 2012
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.
