There goes alternate fuel supplies....

[Neil D]

Why Are Saudis Approving Cheaper Oil?

Short term, the kingdom fears economic disruption from price spikes. Long term, though, it seeks to manage the market with boosted capacity

Unbelievable as it may sound, Saudi Arabia is practically applauding the 22% plunge in global oil prices since July. On Sept. 19, Saudi Oil Minister Ali Naimi called a price of about $60 per barrel "reasonable." Analysts think the Saudis could even live with a price in the mid-$50's per barrel. "The Saudi price target is probably lower than the rest of OPEC; they are still happy at $50 per barrel," says David Kirsch, an analyst at PFC Energy in Washington.

Why would the kingdom, which boasts the world's largest oil reserves, cheer a price slump? In fact, the Saudis never felt comfortable with $70 oil, fearing that sky-high prices might kill off the global appetite for their single source of wealth.

"There is concern that the volatility in the markets is so beyond anyone's control that it could cause severe damage to the world economy," says Sadad Al Husseini, the retired exploration and production chief of Saudi Aramco, the national oil company. The Saudis, he says, "are determined to try and manage better."

INVESTING IN CAPACITY. That's not to say the Saudis want to see prices continue to drop. In the short term, they're trying to keep them from crashing below $50 per barrel by gradually withdrawing oil from the market. But they're also investing tens of billions of dollars to build spare capacity.

At a mid-September OPEC meeting in Vienna, Oil Minister Naimi said Saudi Arabia plans to expand production in seven fields to add 2.4 million barrels per day of capacity, boosting its total to about 12.5 million barrels per day by 2009. On Oct. 1, the Saudis announced they would start work in early 2007 on a new oilfield called Moneefa, which will have 900,000 barrels of capacity and come on line in 2011.

The Saudis want to be able to pump more so they can manage prices by adding supply when markets are tight, and removing it when inventories fatten. Of the major OPEC producers, only the Saudis currently have significant spare capacity. But by 2004 they had allowed their buffer to dwindle to around 700,000 barrels per day, not enough to cover a major outage such as a shutdown of Iranian production. Like the rest of the industry, they were caught napping by the big surge in demand beginning in 2004, which triggered a doubling of prices over the following two years.

DECOUPLING OIL FROM POLITICS. The new production won't come cheap. The cost of expanding production will exceed $24 billion, figures Nawaf Obaid, managing director of the Saudi National Security Project, a Riyadh consultancy. He says the Saudi leadership under King Abdullah wants to "decouple energy and foreign policy" by building up enough spare capacity to offset a cutoff of crude from Iran as well as another major producer such as Venezuela or Nigeria. They also want to tamp down criticism from U.S. politicians.

For now, Venezuela and Nigeria say they are cooperating with Saudi Arabia’s short-term goal. Oil ministers from the two nations in late September promised to cut production by 170,000 barrels per day, which should help the Saudis steady prices without reducing their own 30% share of OPEC production. But some market watchers think the Saudis will eventually have to shoulder nearly all of the cuts of 1 million barrels per day or more that may be required to keep oil above $50 per barrel.

"We have seen the peak [in prices] for a while unless something blows up," says Leo Drollas, an analyst at the Center for Global Energy Studies in London. Even so, the Saudis want an insurance policy of extra capacity in case prices spike again.

[Neil D]

Cheap oil....Ah, smell the sulphur fumes, the Carbon dioxide, the global warming, the cheap way to kill the planet...!

[Neil D]

Oooo boy...Maybe, just Maybe, we can get some relief from supporting the Jihadists? Hey, boys, keep them prices up..we don't want to be dependant upon you and continue the "terrorism for oil" program...

Oil back below 60 usd amid doubts over OPEC output cuts UPDATE

LONDON (AFX) - Oil prices fell back below 60 usd, reversing yesterday's modest gains, amid doubts the OPEC cartel will come to an official agreement over output cuts before its December production meeting.

At 10.57 am, November-dated Brent futures contracts were down 24 cents at 59.75 usd, after gaining 78 cents to settle at 60.00 usd yesterday. Meanwhile, November-dated US light crude futures were down 25 cents at 59.78 usd.

Prices rose yesterday, recovering from 7 month lows hit earlier this week, after OPEC president Edmund Daukoru said the group was considering holding an emergency meeting before its Dec 14 conference to discuss output cuts.

Daukoru, however, failed to confirm or deny a slew of reports attributed to anonymous sources from OPEC member countries who said the cartel plans to trim its daily production by 1 mln barrels.

At the same time press reports cited Nail al-Jubeir, a spokesman for Saudi Arabia's US ambassador, as saying there is no plan in Riyadh to crimp supplies in order to prop up prices.

'It's unbelievable the way they (OPEC) have missed their turn to discipline, you've got individual announcements, denials from the OPEC secretariat... and nothing has been agreed,' said Societe Generale analyst Frederic Lassere.

He said the market is surprised the cartel, supplier of more than a third of the world's crude oil, had not come up with a plan, when prices were high, for what to do in the eventuality of price declines.

'They are not prepared at all. They are having a debate that is more or less public -- which is never good -- so the market will react negatively, it feels it will take time before OPEC is in a position to implement cuts,' he said.

Oil prices have lost some 24 pct since peaking above 78 usd in July and August as swelling US fuel stocks, reduced supply-side risks and signs of slowing US economic growth weigh on sentiment.

On Wednesday, US data showed crude stocks put on 3.3 mln barrels last week, to stand 6.7 pct above year-ago levels, while distillates, which include heating oil, put on 200,000 barrels to levels not seen since 1999.

Although inventories, especially of crude, have been robust for much of the year, the market had been marching ever higher, gripped by fear the dispute over key producer Iran's nuclear programme could end in supply disruptions.

The dispute remains unresolved, but concerns are receding that Iran, the world's fourth largest crude producer, will withhold oil sales if slapped by UN sanctions over its refusal to halt uranium enrichment.

The foreign ministers of Britain, China, France, Germany, Russia and the US are due to hold a crucial meeting in London today that the US and Britain hope will lead to the drafting of a UN sanctions resolution against Iran next week.

'The market is not convinced that whatever the decision on sanctions, there will be a strong impact on the oil market itself. To get to the point where Iran would decide to implement an oil embargo is a long way away,' said Lassere.