Saudis lean toward cheaper oil

Kingdom indicates that $50 to $55 per barrel is good price for global economy and its own

January 28, 2007|By Jad Mouawad | Jad Mouawad,New York Times News Service

Saudi Arabia, which benefited immensely from record oil prices last year, has sent signals in the past two weeks that it is committed to keeping oil at about $50 a barrel -- down $27 a barrel from the summer peak that shook consumers across the developed world.

The indications came in typically cryptic fashion for the oil-rich kingdom. In Tokyo last week, Ali al-Naimi, the Saudi oil minister, said that Saudi Arabia's policy was to maintain "moderate prices." The previous week, on a stop in New Delhi, he effectively put his veto on an emergency meeting of the Organization of Petroleum Exporting Countries to prop up prices after oil briefly dropped below $50 a barrel, the lowest level in nearly two years.

The events that propelled oil prices above $77 a barrel in July, then dragged them down again, were beyond the control of any single producer. Still, Saudi Arabia, which is by far the largest oil producer within OPEC and sets the cartel's agenda, is seeking to avoid a repeat of the drastic run-up in prices while trying to put a floor beneath them.

Nowhere was last summer's spike in oil prices felt more profoundly than in the United States. As gasoline rose above $3 a gallon, consumers cut their spending elsewhere, tamping down profits in retail, travel and other industries. U.S. automakers were devastated as consumers fled from large vehicles to smaller ones, which have historically been the specialty of the Japanese; last Thursday, Ford said that 2006 had been the worst year in its history.

The recent slide back to $50 a barrel for oil -- which translates to about $2 for a gallon of gasoline -- has eased the pressure on the domestic economy, quieting talk that oil prices and the declining housing market would lead to a recession.

The Saudis appear to be rediscovering that painfully high energy prices take a profound toll on the global economy, which in turn reduces demand for their oil. But other motives seem to be at work, too, including the Saudis' desire to restrain Iran's ambitions in the region.

How much influence the United States has exerted is an open question. Vice President Dick Cheney met with Saudi King Abdullah in Riyadh in November, but his office would not say whether oil was discussed. The White House has been supportive of Saudi energy policy, and President Bush and his father are close with Prince Bandar bin Sultan, the national security minister and former Washington ambassador.

Although Saudi officials say their oil policy is based on market considerations and not political ones, the meeting in November led to renewed speculation the kingdom might be tempted to dry out Iran's ambitions by pushing oil prices down.

Prices at $50 to $55 a barrel are just about right for the Saudis, say Saudi energy officials: not too high to hurt the global economy, not too low to hurt their own. Last year's record highs meant that the growth in global oil demand slowed to 1 percent in 2006, compared with a 4 percent increase at its peak in 2004.

But 2006 was not the first reminder for the Saudis that too-high prices can backfire. The oil shocks of the 1970s and 1980s also set off a scramble for gas-sipping cars and a push to wean the West from its oil dependency. In recent months, the higher prices have rekindled America's quest for alternatives and propelled energy security to the top of the agenda in the United States and Europe. Even President Bush, who began his presidency seeking to increase domestic oil production, called for cuts in gasoline consumption over the next decade in last week's State of the Union address.

High prices have also emboldened rivals within OPEC, among them Iran and Venezuela, which have used their oil revenue to prop up their governments and export their political agendas. Saudi Arabia, which sets the agenda at OPEC, has worked cooperatively with Iran since the late 1990s, when oil producers were panicked by the decline of prices to about $10 a barrel. More recently, Iran has favored rising prices over the moderation that Saudi Arabia seeks. Venezuela, on the other hand, also tends to favor higher prices but wields less political influence in the cartel.

"High prices are not in the interest of Saudi Arabia," said Sadek Boussena, a former OPEC president from Algeria. "We've all seen what $70 does: It attracts alternatives, it reduces demand. On the other hand, I don't think the Saudis want oil below $50. They need the revenue."

The Bush administration has repeatedly acknowledged Saudi Arabia's efforts in trying to moderate prices. "Buyers and sellers have a common interest in maintaining reasonable prices for oil," Samuel Bodman, the energy secretary, said in October.

Al-Naimi, the Saudi oil minister, borrowing the manner of a careful central banker, is rarely explicit about his plans. His every word is dissected by legions of analysts for the slightest hint of an inflection in policy.

Sometimes, the uncertainty leads to more conspiratorial theories. Oil traders have been buzzing in recent weeks about whether Saudi Arabia was seeking to depress oil markets in hopes of crippling Iran's economy, as a Saudi analyst -- albeit not one from the government -- suggested in an opinion article in The Washington Post late last year. The Saudis dismissed the claim, but given the tensions in the Middle East, oil and politics remain closely linked.

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