FT Alphaville " Why Saudi Arabia wants to bathe the world in affordable oil Thursday's Opec meeting is expected to be a cracker. Supply is relatively abundant right now, but Saudi Arabia wants the quota raised. Iran, Venezuela, and a bunch of other Opec members fearful for their export receipts definitely do not want that. The FT's Guy Chazan writes that it's expected to be a tussle that Saudi and its Gulf state allies will lose, despite their considerable power within the cartel. The point, some industry watchers maintain, is just to send a message that Saudi's got this: that is, it won't let high oil prices worsen the risk of a global slowdown. A message it probably sees as very necessary as the Iranian sanction deadline draws nearer, and the world economy looks more fragile. But is there more to it than just jawboning? Oil watcher and economist Phil Verleger has some reasons why Saudi Arabia's insistence on raising production quotas is a sincere bid to keep prices under control, and would willingly risk prices falling below its own "break even" price. He summarised his reasons this way: The economy. Saudi Arabia recognizes that lower prices in 1999 were a great helping solving the Asian debt crisis. Russia: The Saudis are very upset with the situation in Syria. Lower oil prices will convince Putin to cooperate. Iran: Lower oil prices will increase pressure on Iran. Canada and the US: Lower prices will slow development of shale oil and tar sands. Conservation: lower price might just slow the move of the US to efficiency. (might) G20: Saudi Arabia likes to be considered part of the club. Lower prices would help renew their membership. These arguments, although somewhat speculative, do seem to check out. On Syria, Verleger points out this report from the New York Times in February, when King Abdullah of Saudi Arabia criticised Russia and China for vetoing the UN Security Council resolution: The Saudi king rarely speaks so publicly and bluntly, and his remarks appeared to reflect new concern in Saudi Arabia about the deepening sectarian parameters of the conflict in Syria, where a majority of the population are Sunnis and the government of President Bashar al-Assad is controlled by the minority Alawites, a heterodox Muslim sect. Saudi Arabia considers itself the spiritual beacon of Sunni Islam. Russia, he adds, is vulnerable to falling oil prices - well, you don't need too look far for evidence of that. What about all those fiscal goodies promised to the Saudi population to keep everyone happy and reduce the Arab Spring-domino risk? Verleger believes Saudi Arabia could withstand even lower oil prices for six to 12 months: Earlier this year, the IMF put Saudi Arabia's current account surplus at thirty percent of GDP. Lower oil prices would eliminate the cushion and could even create a deficit. This would not, however, be a problem for the Kingdom, given assets such as US Treasury bills it has accumulated over the past three decades. This we are not so sure about. A sovereign with large holdings of Treasuries might not want to dump a lot of them onto the market. On the other hand, the prices are good and the Opec countries have, collectively, increased their holdings by about $25bn, or more than 10 per cent in the past year. So Saudi Arabia could probably afford to sell a few without too much difficulty. Verleger also believes Saudi would have little problem bringing prices back up, when it wants to: Minister Naimi very skilfully obtained a quick price restoration by the end of 1999 following the price collapse. He and other senior Saudis recognize that other producers, including Russia, will quickly if begrudgingly fall in line if prices drop now to very low levels. It is often the way that among Opec members Saudi Arabia, not having even the pretence of being democratic, employs a bit more long-sightedness than, say, Venezuela. We're not sure what Iran's excuse is... except desperation. Finally, the purported Saudi concerns over weakening demand are fairly non-controversial. The Kingdom has made no secret of its fear of demand destruction, and it's acutely aware that lower oil prices have already acted as a "type of stimulus," as oil minister Ali al-Naimi told the FT in May. Related links: Opec's price hawks press Saudis on output - FT Revealed: Opec's fears that rich countries" appetite for oil is waning - FT Energy Source While we wait for Opec - FT Alphaville This entry was posted by Kate Mackenzie on Wednesday, June 13th, 2012 at 9:40 and is filed under Commodities. Tagged with iran, oil, Opec, russia, saudi arabia.