The Saudis' Game Plan: Micromanage the Oil Markets

OPEC's leaders are trying to finely match supply with demand, as well as with economic cycles. History, however, is against them

A small dinner on the eve of OPEC's Jan. 17 meeting in Vienna brought together a handful of representatives of big producing countries, oil companies, and consultants. It broke up with a hearty toast to "higher prices."

Keeping prices in relatively lofty zones is certainly the intent of the big OPEC players led by Saudi Arabia, the world's largest exporter. The Saudis, who largely call the organization's tune, seem all but certain to push through a 1.5 million-barrrel-per- day production cut on Jan. 17. Saudi sources in Vienna say the kingdom wants to set a floor price of $25 for the OPEC basket of crudes. At the moment, that translates into the low $30s for the West Texas Intermediate crude most often quoted in U.S. newspapers. The OPEC basket is now trading at about $25 per barrel.

Led by Oil Minister Ali Naimi, the Saudis are trying to micromanage the oil markets to an extent never previously seen. Before the production cuts have even been officially announced, they're already talking about output increases in June -- if the world economy holds up. Their tactics aren't irrational. The Saudis are trying to match supply to the annual cycles of demand as well as adjust to the world economy's performance. Demand generally falls in the second quarter as the world's thirst for heating oil abates. It then picks up again later on as motorists' demand for gasoline heats up.


  The question is whether the Saudis can pull it off. They certainly haven't in the past. Just two years ago, oil prices plunged to the $10 range, and the Saudis and other big OPEC players found themselves in financial hot water. Fear of revisiting that scenario is still a major motivating force. What triggered the upcoming round of cuts was a nearly $10 plunge in the OPEC basket in early Dec.

But the decision to cut output, which seems to have been taken in principle late last year, now looks somewhat dated. The outlook for the U.S. economy has turned more gloomy, with some respected economists now predicting outright recession. The Saudis, however, view this weakness as a reason for cutting production -- not adding to it to ease prices.

In addition, Iraq continues to hold more than 1 million barrels of oil per day off the market in its dispute with the U.N. OPEC is assuming that Iraq will resume normal sales. But if that doesn't happen, there's a danger that prices could spike up.


  And prices have hardly been stable over the last year as that sharp fall in December attests. But Ali Naimi and his cohorts are hoping that once the markets adjust to their strategy, prices will settle into a narrow range. Ali Naimi has certainly brought a level of transparency to OPEC that has never been seen before. He has made himself widely available to reporters -- even inviting them to accompany him on his early-morning jogs through Vienna. He signals moves well in advance. Indeed, he was talking about possible need for production cuts last November.

Even though prices are volatile, Ali Naimi says current levels are a lot more enjoyable than the depressed prices of 1998 -- when many thought his job was in danger. Many analysts think today's prices aren't sustainable over the medium term because they will depress demand and spark investment in alternative-energy sources and non-OPEC production. Ali Naimi is betting that they're wrong. In the meantime, he and other OPEC kingpins are enjoying good times.

By Stanley Reed at the OPEC meeting in Vienna

Edited by Douglas Harbrecht

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