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Has Saudi Arabia Really Become An Opec Hawk?

International Outlook


If there's one thing that can spook the oil markets, it is Saudi Arabia hinting that it may favor higher prices. That's exactly what happened when the world's leading oil exporter surprisingly seemed to align itself with such price hawks as Algeria and Iran at the May 22 opec meeting in Vienna. The Saudis agreed to a plan keeping the cartel's output unchanged at 23 million barrels per day over the summer. Only days before the meeting in Vienna, the Saudis, who are traditionally moderates on pricing, had lobbied for a full 1 million barrel-per-day increase in opec's output. "They acted very strangely," says Vahan Zanoyan, senior director of Petroleum Finance Co., a Washington-based consulting firm.

The reaction in the oil markets to the apparent about-face was swift: Hectic trading sent crude oil future prices soaring to a six-month high, as equity markets in New York and Tokyo recoiled.

THIN WALLET. But many analysts question whether the kingdom has really changed its stripes on oil prices. In the short term, say Saudi officials in Riyadh, the kingdom has in fact given its tacit assent to a modest increase in oil prices already under way thanks to healthier demand in the U.S. "There is no doubt raising the opec price to $21 or $22 by yearend could be a welcome change," says one senior Saudi planner in Riyadh. Currently, the average price of the cartel's crude hovers around $19.

Further out, though, officials say the Saudi government is as wary as ever of attempts to raise oil prices too swiftly, since that would undercut Riyadh's game plan of maintaining a healthy, long-term market for its huge reserves. According to the government-owned oil company Saudi Aramco, there has been no letup in a $27 billion program to boost Saudi oil production capacity by around 25%, to more than 10.5 million barrels per day, by early 1995. "It's completely in their interest to go for volume, and that means low prices," says a top Western diplomat in Riyadh.

One reason the Saudis are unopposed to a small, temporary price hike is that the oil-rich kingdom is simply finding itself short of cash. Although Saudi oil income could amount to almost $50 billion this year, military purchases and huge increases, estimated at $2 billion, in already generous domestic subsidies of electricity, water, and gasoline are translating into an expected budget deficit of over $10 billion for the current fiscal year. And official cash reserves are down to less than $7 billion. King Fahd probably devised the new handouts to assuage discontent over the slowness of political change.

TAX BUSTER? Recently, the government has for the first time started asking large foreign contractors in Saudi Arabia, such as abb Asea Brown Boveri Ltd. and Mitsubishi Corp., to arrange financing on large construction projects. "Anyone who tells you the Saudis do not need money now is lying," says Zanoyan.

Also, the Saudis are angry at the European Community's decision last month to support an energy tax designed to limit carbon dioxide emissions. While the proposed "carbon tax" is widely seen as having little chance of being approved in the face of widespread opposition from European industry, King Fahd wants to make sure his vehement opposition to measures that would limit oil use is felt. The Saudis do not want the upcoming environmental summit at Rio de Janeiro to pass any green taxes at their expense. After all, they know full well that only one thing will keep oil consumers coming back for more: low prices.John Rossant in Rome, with Robert Buderi in Boston and Mark Maremont in London Edited by Stanley Reed

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