Saudi Arabia, which benefited immensely from record oil prices last year, has sent signals in the past two weeks that it is committed to keeping oil at about $50 a barrel – down $27 a barrel from the summer peak that shook consumers across the developed world.
The indications came in typically cryptic fashion for the oil-rich kingdom. In Tokyo last week, Saudi Oil Minister Ali al-Naimi said Saudi Arabia's policy was to maintain “moderate prices.” The previous week, during a stop in New Delhi, he effectively put his veto on an emergency meeting of the Organization of the Petroleum Exporting Countries to prop up prices after oil briefly dropped below $50 a barrel, the lowest level in nearly two years.
The events that propelled oil prices above $77 a barrel in July, then dragged them down again, were beyond the control of any single producer. Still, Saudi Arabia, which is by far the largest oil producer within OPEC and sets the cartel's agenda, is seeking to avoid a repeat of the dramatic run-up in prices while trying to put a floor beneath them.
Nowhere was last summer's spike in oil prices felt more profoundly than in the United States. As gasoline rose above $3 a gallon – hitting an all-time high for San Diego County of $3.44 in mid-May – consumers cut their spending elsewhere, tamping down profits in retail, travel and other industries. U.S. automakers were devastated as consumers fled from large vehicles to smaller ones, which have historically been the specialty of the Japanese; on Thursday, Ford said 2006 had been the worst year in its history.
The recent slide back to $50 a barrel for oil – which translates to an average of about $2 for a gallon of gasoline – has eased the pressure on the domestic economy, quieting talk that oil prices and the declining housing market would lead to a recession.
The Saudis appear to be rediscovering that painfully high energy prices take a profound toll on the global economy, which in turn reduces demand for their oil. But other motives seem to be at work, too, including the Saudis' desire to restrain Iran's ambitions in the region.
How much influence the United States has exerted is an open question. Vice President Dick Cheney met with Saudi King Abdullah in Riyadh in November, but his office would not say if oil was discussed. The White House has been supportive of Saudi energy policy, and President Bush and his father are close with Prince Bandar bin Sultan, the national security minister and former Washington ambassador.
Although Saudi officials say their oil policy is based on market considerations and not political ones, the meeting in November led to renewed speculation that the kingdom might be tempted to dry out Iran's ambitions by pushing oil prices down. Prices have already been falling because of mild weather and slowing demand.
Prices at $50 to $55 a barrel are just about right for the Saudis, according to Saudi energy officials – not too high to hurt the global economy, not too low to hurt their own. Last year's record highs meant that the growth in global oil demand slowed to 1 percent in 2006, compared with a 4 percent increase at its peak in 2004.
But 2006 was not the first reminder for the Saudis that too-high prices can backfire. The oil shocks of the 1970s and '80s also set off a scramble for gas-sipping cars and a brief push to wean the West from its oil dependency.
In recent months, the higher prices have rekindled America's quest for alternatives and propelled energy security to the top of the agenda in the United States and Europe. Even Bush, who began his presidency seeking to increase domestic oil production, called for cuts in gasoline consumption during the next decade in last week's State of the Union address.
High prices have also emboldened rivals within OPEC, among them Iran and Venezuela, which have used their oil revenue to prop up their governments and export their more radical agendas.
Saudi Arabia has worked cooperatively with Iran since the late 1990s, when oil producers were panicked by the decline of prices to around $10 a barrel. More recently, Iran has favored rising prices over the moderation that Saudi Arabia seeks. Venezuela, on the other hand, also tends to favor higher prices but wields less political influence in the cartel.
“High prices are not in the interest of Saudi Arabia,” said Sadek Boussena, a former OPEC president from Algeria. “We've all seen what $70 does: It attracts alternatives; it reduces demand. On the other hand, I don't think the Saudis want oil below $50. They need the revenue.”
The Bush administration has repeatedly acknowledged Saudi Arabia's efforts in trying to moderate prices. “Buyers and sellers have a common interest in maintaining reasonable prices for oil,” Energy Secretary Samuel Bodman said in October.
There is no scientific formula for setting oil prices. In the 1980s, the market settled on around $18 a barrel as a fair price. In the 1990s, it was ratcheted up to $22 to $25 a barrel. Recently, oil producers have realized they can charge twice that amount without significantly stifling the global economy, although consuming nations still complain that the price is too high.
Al-Naimi, borrowing the manner of a careful central banker, is rarely explicit about his plans. His every word is dissected by legions of analysts for the slightest hint of an inflection in policy.
Sometimes, the uncertainty gives rise to more conspiratorial theories. Oil traders have been buzzing in recent weeks about whether Saudi Arabia was actively seeking to depress oil markets in hopes of crippling Iran's economy, as a Saudi analyst – albeit not one from the government – suggested in an opinion article in The Washington Post late last year. The Saudis quickly dismissed the claim, but given the tensions in the Middle East, oil and politics remain closely linked.
“It is difficult to work out what the Saudis really want, since they never say things explicitly,” said Leo Drollas, chief economist at the Center for Global Energy Studies, a London-based research group founded by Sheik Ahmed Zaki Yamani, a former Saudi oil minister. Sometimes, he said, “you have to read between the lines.”
The Saudi government does not disclose what oil price it uses when it builds its budget, but analysts at Samba Financial Group, a bank in Saudi Arabia, say they believe the price is $42 a barrel for 2007, with oil production at about 9 million barrels a day. With oil averaging $66 a barrel last year, the kingdom recorded a budget surplus of nearly $71 billion, Samba said, five times more than in 2005.
Saudi officials repeatedly point out that they do not set the price of oil on international commodity markets; they point the finger at hedge funds and other speculative traders for the heightened volatility in recent years. Nor, they say, do they run their oil industry with political considerations in mind.
Al-Naimi has led the ascent of oil prices since 2000 and managed his various partners within OPEC toward better discipline within the cartel. Last fall, under Saudi stewardship, OPEC members twice agreed to cut their output to prevent prices from falling too steeply.
More than any specific target, the Saudis have always sought stability in oil prices. But stability may prove just as elusive this year as it did in 2006, given how vulnerable global oil supplies remain to the vagaries of the weather as well as political turmoil in the Middle East and Africa.
Although OPEC's 12 members decide by unanimous votes whether to ramp up oil production – which lowers prices by making supply more plentiful – consumer pressures ultimately hold sway, and an extremely cold winter followed by a very hot summer could override whatever price goals the Saudis have set.
