Saudis target 'triple-digit' oil price for the first time

Source: Globe & Mail, Jan 16, 2012

Saudi Arabia said on Monday it wanted to keep crude oil prices at around $100 (U.S.) a barrel, the first time the kingdom has targeted a “triple-digit” price and a quarter above the previous ambition of $75 suggested by King Abdullah in November 2008.

Ali Naimi, the powerful Saudi oil minister, said the world’s largest oil producer aimed to “stabilize” oil prices slightly below the current level of $111 a barrel.

“Our wish and hope is we can stabilise this oil price and keep it at a level around $100”, Mr Naimi told CNN television. “If we were able as producers and consumers to average $100 I think the world economy would be in better shape.”

Brent rose 92 cents higher at $111.36 a barrel in afternoon trading in London on Monday.

Saudi Arabia is traditionally seen as a moderate country within the Opec oil cartel. But Mr Naimi’s comments put the kingdom in line with hawks such as Algeria and Venezuela, which in the past have said they want to keep prices above $100.



What do triple-digit oil prices mean for growth?

Source: Globe & Mail, jan 4, 2012 (Jeff Rubin)

Can we still expect to see sustained economic recoveries when oil, the world’s principal source of energy, is trading in triple-digit range?

As I argued several years ago in my book, Why Your World Is About To Get A Whole Lot Smaller, triple-digit oil prices will redefine our notion of an economic recovery because as soon as the global economy picks up, oil prices will quickly soar to levels that challenge growth.

Last year was a case in point. In the second full year of recovery from as deep a trough as any seen in the postwar period, oil prices once again rose swiftly to levels that, in the past, torpedoed economic growth. Brent crude, the world oil benchmark, averaged $111 per barrel. This cracked the previous record of an annual average high of $100 in 2008 - a peak subsequently followed by a huge global recession.

The North American benchmark, West Texas Intermediate (WTI), rose even more, increasing by 20 per cent from its 2010 average price of $79. Even with the hefty discount that it traded to world oil prices throughout most of last year (at times over $20 per barrel), WTI still averaged just a shade under triple-digit levels at $95/barrel last year.

Of course there are always special factors to explain these price levels: the Libyan revolution, Iran’s threat to close the Strait of Hormuz, or an increasingly destabilized Iraq. While all these events certainly pose credible threats to world oil production, they are, at the same time, background noise even if they dominate the front page.

The real story behind triple-digit oil prices is not the threat of supply shocks, but the sheer, unrelenting rise in world oil demand. Already closing in on 90 million barrels a day, the quick rebound in world oil consumption to new record highs demonstrates the global economy can’t grow without burning greater amounts of oil.

No matter how many rabbits the oil industry can pull out of its hat, be it tar sands from Alberta or shale oil from the Bakkens, supply just can’t seem to keep pace - at least not at the prices most consumers can afford to pay. That is the message that triple digit prices keeps telling us.

If the global economic expansion, troubled as it may be, continues, we will see even higher oil prices in 2012. But what does that say about the sustainability of growth?

And even if there is growth, what is the pace?