On Second Thought, Saudi Opinions About Oil Prices Might Matter After All
Yesterday I wrote that Saudi Arabia has very little spare oil production capacity, which means it also has very little ability to affect world oil prices. On Twitter, Ed Crooks of the Financial Times took issue with that, suggesting that Saudi Arabia has spare capacity of 2 million barrels per day, about what the Saudi oil minister says. (He actually claims 2.2 million barrels of immediate spare capacity and another 700,000 barrels that could be brought online in a few months.) Unfortunately, there's no way to resolve this definitively since the Saudis simply don't share enough information publicly to judge whether they're telling the truth. My own guess, not to put too fine a point on it, is that the Saudis are lying. They may have a million barrels a day of spare capacity right now (mostly in heavy crude), but I'd be surprised if it were much more than that.
I might be wrong about that, of course. Regardless, though, Stuart Staniford points out that Saudi Arabia still has pricing power, it's just that they don't have much power to move prices down. They do have the power to move prices up:
If you are betting on oil prices falling at the moment (for example if you judge that a European recession and a Chinese slowdown will put a crimp in demand), then you've got to be very aware that during the last recession Saudi Arabia (with a few key OPEC allies) cut production sharply at the end of 2008. After falling as low as $40 in the aftermath of the financial crisis, the Saudi production cuts brought them back to around $70 give or take — fairly consistent with the $75 that King Abdullah had said was a fair price in November 2008.
So, now, in betting against oil prices you'd have to worry that the one power Saudi Arabia does have is to make sure that oil prices don't go far under $100 for very long. Since Brent is about $110 as of this writing, that leaves a lot more room for it to increase than to decrease.
The point of the original Brad Plumer post that I linked to was that the Saudis (and some other OPEC countries) are now addicted to high prices and probably have an incentive to keep them up. And that's true. Even if they're mostly pumping flat out, they still have the ability to cut production if they think prices are falling too low. Given the leakiness of OPEC production "quotas" in recent years, it's not clear how long they could keep this up, but they could probably keep it up for a while. So if Saudi Arabia says it doesn't want oil prices to fall below $100, that might be meaningful after all. In my haste to pour scorn on the Saudi oil minister last night, I lost track of that.
(At the same time, when the Saudis say they can make up for any reductions in Iranian oil supply, I'd be very skeptical. Maybe they can, but I think the bulk of the evidence suggests that they simply don't have the production capacity they say they have. Hopefully we won't have to find out anytime soon.)