Saudi Arabia and the need for $75 oil

Not long ago, when oil prices were at historically high levels, there were calls from within the Organisation of the Petroleum Exporting Countries for production cuts to keep them there. These efforts failed, and Saudi Arabia was responsible for unilaterally increasing supplies to try to calm the market. In fact, the Kingdom saw that while extremely high oil prices may be good for the short-term budgetary needs of oil producing states, they are not good for the global economy. Oil prices have fallen dramatically and oil consumer nations should recognise Saudi Arabia’s long-standing defence of “fair” oil prices and stable production, and realise that just as unrealistically high oil prices are unadvisable, so too are unrealistically low prices. The Kingdom has called for a “fair” price of $75 and, considering the global economic climate, that is an appropriate number.

Crucially, the next few months will be among the first in Saudi Arabia’s history where more than 35 per cent of its oil production capacity is likely to remain idle – far above the historical norm of 15-20 per cent. That comes at an enormous cost, estimated to be more than $15m per day. No other country has the discipline to maintain that much idle capacity. By the end of next year, Saudi Arabia’s oil capacity will reach 12m barrels per day, the result of an estimated $60bn in expansion investments. While this spare capacity will be painful for the Saudi government to carry, it highlights the ever-growing power that the Kingdom maintains over energy security and global prices. With millions of barrels in spare capacity, Saudi Arabia will continue its traditional role of stabilising prices and it will continue to be an essential buffer against any unforeseen supply disruptions.