He could start by lowering his posted prices…
Saudi’s Naimi says determined to bring down oil prices
By Meeyoung Cho
April 13 (Reuters) — Top oil exporter Saudi Arabia is determined to bring down high oil prices and is working with fellow OPEC members to accomplish that, Oil Minister Ali al-Naimi said on Friday.
Brent crude has risen about 13 percent this year, trading above $120 a barrel on Friday, threatening a nascent recovery of the global economy. Oil has traded above $100 for all but a couple of days in the past year.
“We are seeing a prolonged period of high oil prices,” Naimi said in a statement during a visit to Seoul. “We are not happy about it. (The Kingdom of Saudi Arabia) is determined to see a lower price and is working towards that goal.”
The influential Saudi oil minister earlier this year identified $100 a barrel as an ideal price for producers and consumers earlier this year.
Concern of a supply shortage due to production problems in some producing countries and as U.S. and European sanctions target exports from OPEC’s second-largest producer Iran have helped keep Brent crude well above that mark.
Naimi reiterated that there were no supply shortages in the global oil market and the kingdom stood ready to use its spare production capacity if necessary.
Saudi Arabia is pumping 10 million barrels per day, he said. Output at that level would be the highest since November, when the kingdom produced more oil than it had done for decades. Naimi reiterated that production capacity stands at 12.5 million bpd.
“The story is one of plenty,” he said. “Supply is not the problem.”
Fellow OPEC producers Libya, Iraq and Angola have increased output, Naimi said. Non-OPEC members including Canada, the United States and Russia had also boosted supplies, he added.
Saudi stockpiles at home and abroad were full, he added. Inventories in industrialized countries were also filling up, he said.
“Fundamentally the market remains balanced — there is no lack of supply,” he said.
The International Energy Agency said on Thursday that the oil market had broken a two-year cycle of tightening supply conditions as demand growth weakens and top exporter Saudi Arabia increases output.
The agency, which advises industrialized nations on their energy policies, said increased supply and slowing demand growth might already point to a significant rise in global oil stocks.
Stubbornly high oil prices could be expected to ease when markets woke up to the shift in trend, it added.
Warren, I thought you might find the following piece interesting vis-a-vis the transparency of energy pricing…
“Oil markets should heed Libor lessons”
http://www.ft.com/intl/cms/s/0/e6f00814-84b3-11e1-a3c5-00144feab49a.html#axzz1rwAf68OV
Thank you for this great site.
Warren (or anyone),
You often talk about the Saudi’s effectively being a monopoly in that they can set the market price. I’ve been trying to wrap my mind around how “it” actually works.
Does Saudi Arabia put up “this is how much oil we are selling” ..and then the market bids on it and the highest bidder sets the price? And then if Saudi Arabia wanted to move the price upward, they would then offer less for sale?
Or, this is how it seems like you’re describing it: Saudi Arabia says “this is how much our oil costs” and then let’s how much their going to sell float? And then if Saudi Arabia wants to to drive price upward, they simply raise their price, and that leads to the quantiy supplied going down?
Can you explain this in more details?
thanks!
they post prices and pump all they buyers want at those prices
Cause and effect – Mosler posts on Saudi price setting abilities reliably elicit an overlong comment. Finance is the circulatory system of an economy, but thermodynamics is the sustenance.
THESIS:
Saudis have substantially lost their status as the price-setting Central Bank of oil.
They can still set the crude price higher – but they very likely have weak ability (and zero real desire) to set the world oil price lower than the unmanaged market price.
If Saudi unilaterally cut their posted prices by 20%, this would not affect the spot price of oil on the world market by anything close to a proportional amount.
EVIDENCE:
0) Recent Saudi Behavior: The Saudis have never shown themselves willing to substantially exceed 10 mbpd in their production history. The Saudis have produced near 10 mbpd in many recent months. This has not been enough to push the price where they claim to want it.
Saudi has a policy of maintaining a reserve of near 2 mbpd of spare capacity, thus implying that in order to produce more than 10 mbpd sustainably, it must redouble the rate of investment to boost nameplate capacity beyond 12 mbpd. Why would Saudi choose to deplete faster and spend more rapidly to earn less? Saudi’s net export capacity is actually shrinking with time and it is far cheaper for Saudi to reduce the growth in domestic consumption than to further increase production – yet Saudi has not been capable of doing either. The last 1.5 mbpd of nominal Saudi spare capacity is fictional under normal market conditions, and the market begins to price accordingly when global spare capacity approaches this narrow margin.
The empirical price elasticity of Saudi crude production has decreased to near non-existence during periods of growing world demand: http://www.financialsense.com/contributors/matthew-millar/a-change-in-saudi-oil-regime
Jawboning is a poor substitute for driving the market with deeds; by resorting to it, the Saudis make clear that words are their most potent remaining tool.
1) Oil is Non-Fungible: The analogy between liquid hydrocarbons and monopoly money is imperfect. Crude oil comes in a spectrum of non-equivalent grades, with geographically and geopolitically constrained paths to world markets – the combination of these factors makes the various liquids far from fully fungible.
Canadians are currently forced to sell bitumen derived syncrude at discounts of nearly 40% to the Brent price. In theory, Canada could be profitably producing twice as much liquid hydrocarbon as it currently does, even at the abnormally depressed prices their production currently fetches. Yet, in the face of the gaping arbitrage, the world price does not fall to the price of discounted Canadian syncrude. Why?
Because extra Canadian oil cannot easily reach the world market through existing infrastructure; because the existing refineries to which it could be economically shipped cannot optimally operate with additional increments of syncrude; because building up and maintaining the additional productive capacity will take years and billions of dollars of investment and skilled labor in short supply. Because, at every turn, means of boosting the flow of apparently cheap and abundant Canadian liquid hydrocarbons to the world market are lagged and rate-limited.
Extra Saudi oil available to produce cannot optimally be processed by existing refineries (although Saudi is building a couple of its own to help rectify this). If Saudi dropped its posted price 20% across the board, it would not be in a position to meet increased customer demand for the grades of oil that refineries would actually want more of.
2) Hysteresis: Every year the existing global production base dwindles 5% – i.e. a new 3.5+ mbpd /year of production has to come online just to stay in place. Demand growth pushes that figure as high as 5 mbpd /year.
The unconventional tight / ultra-deep / arctic / geopolitically constrained oil that constitute the marginal replacement barrels each year is narrowly profitable, often rapidly depleting production. The marginal replacement barrel of oil requires $70 – $110 / bbl world spot price ( http://www.geoexpro.com/article/Will_Global_Slowdown_Reduce_Oil_Prices/4e39227a.aspx ) and countries that exert national control over their oil production policy require prices nearing $120 / bbl to meet bugetary requirements ( http://rt.com/business/news/oil-prices-drop-forecast-125/ ). As such, capacity above 90 mbpd is capacity that will decay quickly should the price drops much below current levels. But it is capacity which is challenging to ramp up in response to price spikes higher, with lags measured in years.
CONCLUSION:
For the foreseeable future it appears that global liquids production will manage to hold at just above 90 mbpd. The market will run with chronically thin spare capacity, and price will be determined mainly by fluctuations in demand (sensitive to fiscal and monetary policy). Spikes in price and resulting demand destruction will lead to only temporary price relief and decaying maximum capacity.
Sustained attempts to boost aggregate demand through loose fiscal policy will be inflationary due to hard resource constraints, even if other productive factors remain underutilized.
Severely inelastic short term oil supply and demand with respect to price rises, mixed with policy makers bent on visions of growth, equals recipe for high oil price volatility. If policy-makers try to rev up demand, spikes in the price of oil may serve as a hard governor on the global economy.
We are in a new operating regime wherein sustainable economic growth potential is largely set by the rate at which liquid fuel-based energy intensity can be improved.
If Saudi dropped posted prices 20%, Saudi would earn less net revenue despite depleting their resource faster; and Saudi would merely diffuse the remaining little spare production capacity it controlled to a dozen other marginal producers who would ease back replacement production. Much of the additional oil would not be efficient new inputs for existing refineries, and thus would go back into storage (Saudi would simply transfer power to would-be stockpiler countries like China). Thus, net demand for non-Saudi production would decrease only slightly, and thus so would non-Saudi prices.
Saudi has every disincentive to unilaterally drop prices or further push production; which is why they talk unceasingly about their desire for lower prices while continuing to take all the market gives.
“Canadians are currently forced to sell bitumen derived syncrude at discounts of nearly 40% to the Brent price.” – This is wrong, there was a temporary steep discount earlier this year for syncrude, but there is an ongoing discount of more than 30% for Western Canada Select oil, which is a heavy grade that includes oilsand production as a blend component.
A counter argument
http://www.foreignpolicy.com/articles/2012/04/18/how_to_lower_the_price_of_oil