RIYADH, (Reuters) – Saudi Arabia’s newly declared $75 a barrel target price for oil aims to ensure crude export revenues can fund ambitious development plans in the kingdom.
Saudi King Abdullah on Saturday said that $75 was a fair price for oil, the first time in years that the world’s top oil exporter has named its price.
“King Abdullah is thrifty. He hates borrowing,” said one source who has spent more than 20 years working at the kingdom’s central bank, the Saudi Arabian Monetary Agency (SAMA).
The country has channelled tens of billions of dollars from surpluses generated by the surge in oil prices over the past six years to reduce debt, which fell to 19 percent of 2007 gross domestic product (GDP) from 105 percent in 1999.
“Surplus money was allocated to bring down debt with a clear conviction from the king,” said John Sfakianakis, chief economist at SABB bank, HSBC’s Saudi subsidiary.
As crown prince, Abdullah became Saudi Arabia’s de facto ruler in the 1990s when oil prices hit $10 a barrel. He told Saudis then that the era of careless spending must end.
The government is mindful that ordinary Saudis have suffered from high inflation over the past year and millions were hit by collapses on the Saudi bourse in 2006 and 2008.
With an oil price of $75 a barrel, Saudi Arabia will not have to dig into its $300 billion of net foreign assets and foreign currency reserves to fund a projected $400 billion public spending spree over the next five years.
“This will enable us to push ahead with development projects to diversify the economy and reduce dependency on oil,” said Saeed al-Shaikh, chief economist at state-owned National Commercial Bank (NCB).
Benchmark U.S. crude has fallen over $100 from its July peak of over $147 to trade at around $46 on Thursday as oil demand falls the slowing global economy. Global oil consumption looks set to contract this year for the first time in 25 years.
OPEC, supplier of more than a third of the world’s oil, has already pledged to cut supply by 2 million barrels per day since September as it scrambles to match supply to falling demand.
Saudi Arabia is OPEC’s most influential members and was shouldering most of the cuts. The group was set to meet again in Algeria on Dec. 17 to discuss reducing supply again.
The Saudi government would have to clip some of the $100 billion-plus the kingdom plans to spend on expanding the energy industry if prices remain low in 2009, NCB’s Shaikh said.
Oil Minister Ali al-Naimi said that $75 would also encourage new output from marginal, higher cost sources worldwide. By setting what it saw as the fair price for its oil, the kingdom was sending a message to consumers, said Sfakianakis.
“Saudi Arabia wants to maintain investments in the oil industry and $75 seems to be reasonable in meeting demand for OPEC members to maintain these investments,” Sfakianakis said. “The announcement is a sort of disclaimer to say that with oil prices this low you can not always turn to Saudi Arabia if additional oil production is needed,” he added.
Saudi Arabia is the only country in the world able to bring online large volumes of crude supply quickly to deal with unexpected supply shortages.
As the kingdom shoulders most of the cuts in OPEC supply, its spare crude production capacity has risen above the 2 million bpd it keeps as a matter of policy.
Saudi output stood at 8.92 million bpd in November, according to a Reuters survey, nearly 2.4 million bpd below capacity of 11.3 million bpd. The kingdom is on track to boost capacity to around 12.5 million bpd by the end of next year.