PFC Energy released a report a couple weeks ago that suggest that the number needed to support the Saudi budget in 2009 was a little over $50/b. Evidently in a meeting of 27 or so national oil companies in Beijing in October, the general estimate was that oil would go to $40/b. The mood was characterized as “panic.”

If $50/b is what Riyadh needs, they may well choose to cut quotas further in December. (The Kingdom recently suggested that $75/b was a “fair price”.)

Saudi Arabia has the ability to unilaterally cut enough to push up the price … but a cut should not have an immediate effect as stock levels are very high (crude stocks in the US went up over 7 million b Friday before last) and developed-world demand is down. If all available storage is taken by the time a cut is announced, it could take longer to have an effect.

If Russia coordinates, and there have been some noises, the markets would probably respond more quickly.

1) It could smooth over demand shocks, such as the first Iraqi war, and lessen volatility in the markets

2) It allowed Saudi Arabia to wield a big stick to the other OPEC producers. If other members weren’t adhering to quotas, SA could open the spigots and flood the market, driving prices even lower until the rest of OPEC cried uncle and agreed to abide by their quotas. Since SA is the lowest cost producer, such a move would be less painful for itself than for other producers.

Anyway, the major reason for Saudi Arabia’s influence in OPEC and world oil markets isn’t its vast reserves per se, but because it was the only country with any significant reserve capacity. Now that that reserve capacity no longer exists (SA pumps pretty much as much as it can with its current infrastructure), it can no longer act as the world’s oil liquidity source, nor as OPEC’s default enforcer. This may be a significant reason in the decline of OPEC’s power.

“Over the past decade, OPEC has stepped in three times with large production cuts to stop prices from falling – in 2001, 2003 and 2006.

Only once, however, did producers fully comply with their pledges to trim their output, according to analysts at Barclays Capital.

When prices last fell toward $50 a barrel, at the end of 2006, members of the cartel agreed to cuts totaling 1.7 million barrels a day but they cut only 900,000 barrels a day, according to Barclays….

Even if OPEC agrees to reduce its output further, it is doubtful that oil will rebound soon. In the past, it has typically taken three to six months for oil prices to rise after OPEC trims supplies, according to Deutsche Bank.

“In terms of crude oil, we believe downward pressure on prices is likely to persist throughout next year,” according to a report by Deutsche Bank. “OPEC will struggle to cut production as fast as world growth is slowing over the next 12 months.”

I think it helps the Saudi power in the region to have prices lower. They know it hurts their main rivals and are smart enough to see the world needs cheaper oil to help over come the weakening economy.

great ideas

The Fed’s power, its influence, is profound, and ever moreso in this era of aggressive financial engineering. Krugman uses that narrow argument to point to the Adjusted Monetary Base as his sole metric and say, “See the monetary base went up in the Depression in his Chart 1, just as it is today in Chart 2. Therefore there was no error from the Fed at that time because it was all that they could do.”

Everybody losing mojo!