WSJ: Saudi Arabia's Oil Equation

Dow Jones Newswire via Rig Zone ^ | December 08, 2008 | Liam Denning

[thackney]

OPEC has a math problem.

When demand for oil is rising, members of the Organization of Petroleum Exporting Countries take extra portions from the expanding output quota pie. But when it falls, as now, they are supposed to share the pain of lower production even as oil prices are declining, a double blow to cash flows.

As the organization's biggest member, much of the burden of managing all this rests on Saudi Arabia.

Yet it also must consider its customers and long-term demand.

This largely explains OPEC's recent decision to put off further output cuts, even as crude prices continued sliding. It also is why oil bulls can expect little relief from Riyadh next year.

Saudi Arabia's current output quota is 8.5 million barrels a day. After domestic use, that leaves seven million barrels for daily export. Ahmad Abdallah, commodity analyst at financial-services firm GaveKal, points out that Saudi Arabia's 2008 budget was set at $109 billion. With oil exports accounting for just under 90% of public revenues, that equates to an oil price of $38 a barrel to balance the budget. The OPEC basket price has averaged $98.50 a barrel this year.

Nymex crude-oil futures, having dropped 17% in the past week alone, now command just $42. The OPEC basket price typically trades at a discount of $5 to $10. Were Nymex crude to average $40 next year, and OPEC crude $35, Saudi Arabia's 2009 oil-export earnings could drop to $89 billion.

[evad]

Low oil prices as well as public apathy will give the Dems the opportunity to come down hard on the oil and gas industry in the US. I’ll bet we see massive amounts of Federal land become off limits to new and continued exploration.

ZAKLY!!

[evad]

Saudi Arabia is acting like a smart heroin dealer: they give us enough junk to keep us addicted by they avoid killing off their cash cow.

hmmm...an interesting theory but do you really think that's why the bottom has fallen out of oil prices?

[ggekko60506]

“hmmm...an interesting theory but do you really think that’s why the bottom has fallen out of oil prices?”

No. I do not think the Saudis are that smart. I do, however, believe that they are being pretty cagey by refusing to cut output immediately at this time.

What is not commonly appreciated is that there are significant political tensions within OPEC that could be exploited if Western political leaders were more adroit.

Most cartels eventually collapsed because of such internal political tensions. After the first Gulf War OPEC very nearly collapsed because the Saudis greatly ramped up production. OPEC nearly collapsed again during the 1998 - 2000 period when a barrel of oil fell to less than $9.00 per barrel.

If the U.S. had looked upon this as an opportunity rather than a problem we could have broken OPEC’s back during this period. Instead of locking out more and more areas for oil exploration as a sop to the environmental lobby a small move toward exploration could have crushed OPEC.

The accession of Obama could not be worse from this perspective. The enacting of even a small part of McCain’s energy proposal would have consigned OPEC to the dustbin of history.