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| Triple-digit delight |
| Edward Hadas & Una Galani / Oct 21, 2009, 00:07 IST |
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Oil: Oil at about $80 a barrel is close to being too expensive for the world. Saudi Arabia and the other big producers ought to be thinking about slowing the ascent of the price of crude. But they will probably be happy to watch oil drift higher. Most Gulf states, and Russia, balance their budgets at about $65 a barrel. Saudi leaders have suggested that $75 is the right price – high enough to prevent customers getting restive, but low enough to keep them from thinking too hard about using less or trying alternatives. Abdallah Salem el-Badri, the secretary general of oil cartel Opec, has suggested $80 is needed to keep up investment.
The current price may not yet be above everyone’s target. But the 20 per cent increase in less than a month suggests the time has come for the big producers to rethink their resistance to upping production. It is easy for them to find justifications for yet higher prices. El-Badri pointed out the average price of a barrel of crude so far in 2009 is only $57 – well below Opec’s desired price. Dollar weakness reduces the buying power of $80 oil. And perhaps producers need to pay back big debts.
The difficulty is that even if producers wanted to flood the market, they would have their work cut out. The recent rally has come despite ample inventories. Close co-ordination among producers has generally kept the supply and demand for oil pretty well balanced.
That pattern is sadly familiar. When the oil price sped to well over $100 as the financial crisis was coming, analysts rationalised the rise with theories of an imminent supply squeeze caused by overwhelming demand from fast-growing Asian economies. In reality, a huge supply of ready money – from commodity funds and industrial buyers – ruled the market. Something similar is happening now. If the liquidity keeps flowing, one result is likely to be triple-digit oil. And the big producers won’t worry too much if they are powerless to stop it.
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