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.
At the time I wrote my book (2010/2011), the economic floor price was higher than the technical floor price and I guess this gap has increased since 2010. I estimated the economic floor price to be around $60 or $70.
Meanwhile we saw the Arab Spring, the uprising of the Arab population in many countries like Tunisia, Egypt, Libya, Syria and Yemen, just to name a few. The Arab Gulf countries feared contagion, so the Saudis and other oil-rich Arab countries increased government spending in order to keep their people happy. According to the Financial Times, Saudi Arabia has increased its 2011 spending by 25%.
In January 2012, Saudi Arabia´s oil minister Al-Naimi declared that his country wants to keep the oil price at “a level around $100”. His mantra is now that oil prices at $100 don´t harm the global economy. I still remember November 2010, when Al-Naimi said the exact same thing about an oil price of $90 per barrel. Simple pattern, big effect.