Saudi Arabia probablywill target oil prices for 2012 at $100, according to several media reports. The desert nation says it needs the price to be that high to offset planned expenditures by its government. The Saudis have a real chance to hold crude at that level because the country continues to be the world’s largest producer and the leader of OPEC. As for the the effect of high oil prices on the balance of the world, the Saudis do not seem to care.
The Saudis have said already they will make up for oil production shortfalls if there is trouble in the rest of the oil export world. That could include the Strait of Hormuz and Nigeria. Yet, even the Saudis cannot produce enough crude quickly if the standoff with Iran in the strait becomes a battle. Any supply interruption anywhere in the world gives the Saudis more leverage with prices as their production becomes a larger factor in world consumption.
The Saudis have decided to play the tightrope game, wherein it bets that it can hold prices at $100 without killing global economic growth. Should the worldwide economy tip into recession and China’s demand falls quickly, the $100 price will not be a realistic one if the Saudis want demand to stay even moderate. They will have to take lower profits or lower their price target.
The Saudis have decided that a global recovery is now fully underway. That means they think the demand in the developing world and the U.S. can offset a lower need for crude in Europe, and perhaps China.
The decision leans on a global economic expansion, and that may happen. But the Saudi crystal ball is no better than any other. The country could be caught in major downdrafts, some of which they will create themselves with high prices, before the year is over.
Douglas A. McIntyre