Comfort level: Why does crude oil’s steady price recently have Saudi Arabia and China smiling?

Commentary News

The Saudis are comfortable with $70-$80 barrel of oil these days, and with the lack of rhetoric in the United States concerning the price of gas, Americans would appear comfortable with the current barrel price too.

But would OPEC really boost output to keep prices in this comfort range if crude consumption rises from here?

Regardless of whether OPEC ultimately increases its production to accompany a rise in consumption and price, it certainly is the right thing to say – and repeat. After all, Saudi Arabia has invested heavily in upstream energy infrastructure to boost capacity greatly. It is understandable that one would want an increase in demand to warrant the use of that new production capability to make the investment worthwhile.

As Saudi Petroleum Minister Ali Al Naimi put it in an interview in September, “We believe that around 75 dollars is a fair price for both producer and consumer. And why do I say 75? Now to produce some of the hydrocarbon sources, it requires a price which rewards the investor. Some of these investments need a price between 60 and 80 and that’s why we chose a fair price of around 75 dollars.”

In addition, OPEC’s eyes should be on China, with some putting its annual economic growth at 12 percent this quarter. While demand for crude surely will rise in the short term as China bounces forward in the post-global economic recession era, they also are investing heavily in alternative fuels, at least more so that the United States. New York Times columnist Thomas Friedman wrote, “I believe future historians may well conclude that the most important thing to happen in the last 18 months was that Red China decided to become Green China.” In the latest example of apparent U.S. inferiority on alternative research and development, BP just closed its solar plant in Maryland, USA as it moves much of its green division to China.

Even the Saudis are investing heavily in solar, recently completing a solar powered desalinization plant. But as the Gerson Lehman Group poses the question in a study of the possibility for alternative technology market in Saudi Arabia:

“The amount of investment of 90 billion dollars would make a significant impact in the current technologies of Wind and Solar Energy. There is no question about that. The question is, if you are sitting on top of the world’s biggest Oil & Gas Field, would you invest to explore it to maximum or invest in an infant industry? Especially in an environment of mature fossil fuel market?”

Crude long-term prospects are, as they have always been, uncertain. In the short to medium term, OPEC is happy with $70-$80 oil because it keeps the market stable as it is basically an average of the high swing in 2008 to the low point early 2009. In the absence of angry rhetoric about gas prices recently in the United States, and the short- to medium-term growth expected to continue in China, Saudi Arabia is happy to continue to invest the stream of crude oil revenue into its own economic diversification.

-LZ