Skip to main content

Saudi Arabia Sets A $20-$40 Price Range For Crude Oil, For Now

Saudi Arabia has found itself between a rock and a hard place lately. When it comes to the direction of the price of crude oil, that is.
The Kingdom is caught in a situation where big swings in the price of crude oil in either direction are damaging to its economic and political future.
That’s why Saudi Arabia campaigned for production freezes back in January, as oil was heading towards the $20-mark, rather than for an outright production cut, in my opinion. A production freeze would help to keep the price of oil in the range of $20-$40 a barrel, while an outright production cut would cause a price spike well above $40.
Why would a price spike above $40 be a bad thing for Saudi Arabia?
Because it would provide a life support to American frackers who have undermined the pricing power of the Kingdom these days, as was discussed in a previous piece here.
But there’s another, more important problem: high crude prices can help Russia and Iran raise the funds they need to support insurgent movements that threaten the Kingdom’s regime.
As one of the commentators in my recent piece put it:
“The Saudi’s don’t care about frackers at this point. What they do care about is Russia and Iran being able to fund destabilizing groups that threaten their regime. Keeping oil down helps the US and somewhat prevents Russia and Iran from funding these groups to the point they can win. The Saudi Royals don’t want to give up power just yet. And the only way to do that at the moment is to keep oil low.”
“What’s happening right now is to artificially pump oil into the market to depress the prices such that the ISIS and Putin will run out of funds for their adventures,” adds another commentator.“It’s not a coincidence that the oil price started tanking when Putin invaded Ukraine.”
Recommended by Forbes
To be fair, Russia has been going along with Saudi Arabia’s freeze proposal. But what oil producing countries say in public and what they do in private isn’t necessarily the same thing. “A four nation price freeze at January production levels, which were already at their highest levels in years, does absolutely zilch to balance world supply and demand,” says Kevin Rooney, CEO, Oil Heat Institute of Long Island.
While too high crude oil prices are bad for the Kingdom, too low prices aren’t better either. For a different reason: they make it hard for Saudi Arabia to maintain its fiscal and social budget. As a third commentator put it:
“Saudi Arabia needs $80+ oil to balance fiscal and social budgets. As it is they had a $90 billion dollar deficit last year because of the lower prices.”
But there’re other ways for Saudi leaders to maintain their fiscal and social budget, like tapping into the country’s reserve funds, as they have already been doing. But these funds can burn fast. “The burn rate for KSA is significant — despite the reserves pre-collapse, they will reach a point of non-recovery in order to maintain some degree of social order,” adds a fourth commentator. “The last 10-15 years of seen their social program costs significantly multiply, which cannot be reversed to a significant degree without social unrest.”
Then there are the capital markets, where Saudi Arabia is already issuing billions of debt. And there’s the prospect of selling state assets.
That’s why I would place the country’s fiscal survival somewhere in the middle of the $20-$30 per barrel, in line with official assumptions for a $29 per barrel for 2016.
Still, being between a rock and a hard place is a difficult situation to be in. In the end, the Saudi Kingdom will have to decide what’s worse for its economic and political future — a higher crude oil price or a lower oil price.

Comments