“Comfort Zone” Inflation?

Commentary

When Saudi Minister of Petroleum and Natural Resources, Ali Al Naimi, said last week that oil price’s “comfort range” was $70-$90, it was a departure from the previously established range by the minister of $70-$80. It caused the price of oil to jump and speculators to buy up oil in the hopes that it would soon reach the top of that range.

However, the Wall Street Journal today carries this piece, citing a senior Saudi official as saying, basically, that the minister’s comments edging the top of the “comfort range” to 90 were a misstatement (or misinterpreted).

So, which is it?

We’ve discussed this $70-$80 “comfort range” on this site as being equitable for producers and consumers alike, and it’s a good price to keep petrochemicals and refinery operations growing. We wrote that “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.”

Would the adjustment of this range to $70-$90 be that large of a departure?

It depends on who you ask. But one key point in all of this is that both producers and consumers seem to be happy not only with the price, but the price’s stability. Wild variations in oil’s price could have a rippling effect on world economies, and an increase in oil’s price could stump US economic recovery. This is absolutely key for Saudi Arabia, a US economic and military ally whose currency is pegged to the dollar.