Back in December, the blog analysed statements by King Abdullah, and concluded that Saudi Arabia had a ‘target range’ for oil prices of $75 – 100/bbl. Yesterday, this analysis was confirmed by Saudi Oil Minister, Ali Naimi, who said the world economy could now “weather oil prices at $75 – 80/bbl”.
The blog fears that Naimi is being too optimistic. High oil prices effectively act as a tax on consumers, reducing their discretionary spend. This impact can be disguised for a period, as happened in 2007 – 8, whilst the value chain builds inventory in advance of anticipated price increases. But in the end, underlying demand is revealed to have collapsed, as the chemical industry has recently discovered to its cost.
There is, however, another side to the Saudi’s argument about prices. And here the blog is in agreement with their analysis. This is that $75/bbl is probably the minimum level required to attract the investment required to maintain current supply levels. And this is a critical consideration, with oil field depletion rates currently running at 9.1%/year on existing fields.
So the chemical industry is caught in a vice. If oil prices stay low now, this will help sustain demand in the short-term, but then likely lead to much higher prices (>$100/bbl?) in the future. If they rise now, this will help to assure supplies for the future, but at the cost of a sustained period of lower (perhaps even negative) growth rates.