Time to sit back and relax for Saudi’s oil drilling machines

Time to sit back and relax for Saudi’s oil drilling machines

Opec tells its members to stick to the maximum production quota to limit oversupply and keep oil prices from falling.

September 10, 2008 12:42 by kippreport

Even as the Opec president Chakib Khelil called on members to stop producing more than the prescribed oil quota, crude oil prices leaped. The move is expected to reduce supplies by 520,000 barrels a day.
Oil prices have been dropping drastically over the summer(from around $147 per barrel in July, to less than $99 this month), and the group blamed this on “oversupply” in the market. Opec’s official output is set at 27.25 million barrels a day, but about another 1 million barrels flow on to the market. According to reports, Saudi Arabia is producing more than 700,000 barrels per day above its formal target.

Reports also suggest that while Opec wants to maintain prices at least above the $100 mark, Saudi and other Gulf states seem comfortable with a figure below $100, perhaps about $80-$90.

When prices were rising toward a record of $147 in July, King Abdullah, Saudi Arabia’s ruler, mandated a production increase of 500,000 barrels per day above the Opec limit.

But why did Saudi want to keep the prices low? What would they gain?

Inflation is skyrocketing across the Gulf, and with the local currency pegged to the US dollar, there’s not much that the countries can do to combat this. But Saudi is the largest oil producer in the world (it accounts for roughly 30 per cent of total output from Opec), and hence, oil price is one thing it can control. Perhaps by increasing oil output and in-turn reducing oil prices, it will be able to improve the value of the US dollar, which will also mean a better value for the local currency.
More recently, the country was also under a lot of pressure from the US and other governments to increase oil supply.

“We have worked very hard since June’s meeting to bring prices to where they are now. I think everything is in balance,” Ali Al Nuaimi, Saudi Arabia’s oil minister, had said ahead of the Opec meeting.

While it is doubtful that Saudi will be complaining about Opec’s recent decision, it certainly does seem that its oil drilling machines are going to be having shorter working days.