The move is a sign that the kingdom needs higher oil revenues to sustain its big rise in public spending
Saudi Arabia’s oil minister stating $100 for a barrel of oil is a ‘fair price’ is effectively Riyadh setting a de facto oil price for 2012.
Historically, the kingdom has not been as fanatical about maintaining high prices as other member states such as Venezuela and Iran, but Ali al-Naimi’s comments definitely reflect a change in policy.
The timing is perfect for Riyadh to become more militant over oil prices. As the US leads Western nations with an oil embargo against Iran, Saudi Arabia’s oil is going to be more in demand than ever in the next 12 months.
The embargo could test the kingdom’s 12.5 million barrel-a-day capacity and while questions remain over how long that figure can be maintained, Riyadh wants to maximise its returns to the full.
Another important point is that Saudi Arabia needs the money. According to the regional projects tracker MEED Projects, the kingdom has $510bn-worth of infrastructure, hydrocarbon and power projects either being executed or in the planning, design or tender stages.
What also needs to be made clear is that most analysts have not predicted any major
fall in oil prices during 2012, despite the threat of recession in Europe causing another global slowdown.
The break-even oil price for the kingdom’s 2012 budget has been set at $80 a barrel, but most analysts believe between $90-100 a barrel is a probable price, with added caveats for higher prices if the situation with Iran escalates.
Al-Naimi’s comments should be interpreted as a gentle reminder to the rest of the world that a secure flow of oil from the world’s largest exporter comes at a price. And that price starts at $100 a barrel.