Highlights
– Saudi Arabia a moderator between oil producers and oil consumers, with an eye toward sustained demand
– Poor OPEC member countries are dependent on record high oil revenues to support augmented government budgets
– Oil price to stabilize around $100 a barrel regardless of OPEC output
– Trend toward oil substitutes will continue in the mid to long-term
Since Saudi Arabia’s June 2008 announcement it was unilaterally increasing oil production to meet consumer demand in order to bring down the price of oil, the media has been awash with discussion of Saudi Arabia’s role as the moderator between oil producer and oil consumer countries. Once again, following the Organization of the Petroleum Exporting Countries (OPEC’s) September 10, 2008 conference in which the oil cartel voted to return to September 2007 output quotas, effectively removing what it deemed excess production from the market, Saudi Arabia discretely indicated it would continue to meet the demands of its customers regardless of established quotas. This is not to say that Saudi oil ministers do not agree that excess supply exists in the oil market, but rather is reflective of Saudi policies that are geared toward reducing the price of oil to between $90 and $95 a barrel.
Saudi price targets are not, however, shared by all members of OPEC. Some members like Iran and Venezuela have indicated the need for a more aggressive cut in production in order to completely eliminate the two million barrels per day (bpd) of excess oil supply on the global market. The two opposing sides represent a division in OPEC between members. On the one hand are members like Saudi Arabia and Kuwait, long-term investors that can afford lower oil prices. On the other hand are members like Iran and Venezuela that rely heavily on high oil prices to maintain under funded social welfare programs, food and gas subsidies and expanding military programs.
Regardless of which group wins the debate in OPEC, recent trends indicate global markets recognize the danger embedded in oil price volatility and consumers are decreasing their demand for oil products in favor of more efficient uses of oil, as well as cheaper, more stable sources of energy.
Long-term Price Stability vs. Needs-based Policies
Saudi oil policy can be summarized as wholly motivated by long-term price stability. Saudi policy-makers are weary that high sustained oil prices will lead to a repeat of the 1990s oil price collapse from $20 a barrel to $8 a barrel. Even more so, Saudi oil ministers fear that persistently high oil prices will force consumers to seek out substitutes—coming from the economic principal of substitution, in which a consumer will substitute a lower priced good for a high priced one when the two goods can be used to satisfy the same needs. For Saudi Arabia, a long-term trend toward biofuels and other renewable energy sources would mean sustained economic losses. The kingdom is therefore willing to accept lower oil prices in order to slow, perhaps even forestall, a worldwide trend toward biofuels, nuclear energy and more energy efficient engines.
Faced with immediate financial deficits, poor OPEC members, like Iran and Venezuela have expanded government spending in line with higher oil revenues. As a result of increased spending on social welfare, subsidies and augmented military budgets, these countries are now reliant on the record high oil revenues. Unwilling to focus on long-term demand and production goals, these countries are less willing to increase the global supply of oil regulated by OPEC.
Outlook: Declining Demand
For both parties, a shift toward more energy efficient cars and nuclear energy, as well as increased government investment in biofuel development and research, suggests record high oil prices in the first six months of 2008 set in motion a trend toward substitution (Previous Report). The combination of the weak US dollar, the collapse of global equity markets and high oil prices resulted in a decline in oil demand.
OPEC responded to the downward trend on September 17, 2008 by lowering its 2009 oil demand forecast from 87.80 to 87.66 million bpd. Its actions alone, however, will prove incapable of averting a decline from record high oil prices, with market speculation and political risk playing a large role in global oil prices.
As a result, the global oil price will likely stabilize around $100 a barrel in the mid to long-term. The trend toward increased oil efficiency and environmentally friendly oil substitutes will also continue unabated regardless of oil price for the mid to long-term, as oil consumers seek out energy sources that are associated with less price volatility.
