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To: ms.smartest.person who wrote (1540)	10/6/2006 3:43:32 PM
From: ms.smartest.person	Read Replies (1) \| Respond to of 3198

Why Are Saudis Approving Cheaper Oil? OCTOBER 4, 200 energy By Stanley Reed 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. businessweek.com