Saudis May Raise Output To Pull Prices Down.

Saudi Arabia might seek to brake any new oil price spike, mainly to protect a fragile global economy and prolong its own role as the world's top oil producer - and if that hurts its rival Iran, it will shed no tears. Immediate pressure for Riyadh to use its vast spare capacity to produce more crude has faded somewhat as paper WTI has dipped back below $80/b, after hitting $82 in the previous week, its highest level this year. But an un-named Saudi government adviser was on Oct. 30 quoted as saying the price had reached "the high end of our range" and any further rise could prompt the kingdom to react".

The Saudi official added: "Especially now that the global economic system is recovering, we don't want to be seen as letting the oil price spiral out of control and affecting the recovery". He said Saudi Arabia's membership of the Group of 20 (G-20) industrial and developing powers meant it had to be seen to be living up to its "new-found global responsibilities".

Saudi Arabia, an ally to the US which sees itself as the guardian of Sunni Islam, has long competed with the Shi'ite theocracy of Iran, especially since the 1979 Islamic revolution toppled the pro-West Pahlavi monarchy. Oil is at the heart of the kingdom's regional clout.

Saudi Arabia derives almost all of its position in international politics from the fact that it is the largest oil exporter. Without that, it does not matter whether Iran is strong or weak. Besides Riyadh's urge to shield the global economy by moderating oil prices, however, Saudi Arabia knows that a lower oil price will weaken Iran.

The Saudi government adviser acknowledged that any extra pain for Tehran, which needs a higher price than Riyadh to balance its budget, would be a side benefit, but he said Iran was already "unravelling" under political and economic pressures. He added: "So the urgency of [depressing prices] directly in an aggressive way has become secondary to our global responsibilities in the oil market".

Valerie Marcel, an energy analyst for the London think-tank Chatham House, believes Saudi Arabia would not put its quarrels with Iran above its economic interest in strong world demand for oil. She says: "Saudi Arabia would not set its volumes policy on the expected impact on Iran. Its main concern is that a higher price will threaten [world] economic recovery and future demand for oil. Certainly Saudi-Iranian relations are not good but the economic stakes are higher than politics in this case. Iran has been pushing for higher prices for a while now because of its own economic woes".

Saudi Arabia needs oil prices to average $51/b to balance its budget in 2009, while Iran needs an average price of $91/b according to IMF estimates. The Iranian parliament in October approved plans to phase out burdensome food and energy subsidies in what the government portrayed partly as an effort to make the theocracy less vulnerable to any more sanctions over its controversial nuclear ambitions.

It is in Saudi Arabia's interests to rein in oil prices, but it has raised its price aspirations this year, in fact bringing them closer in line with the needs of Iran. In March, when it was more worried about the global downturn and oil prices were below $50, Riyadh said it was more important to nurture the world economy than to push oil to the levels it considered necessary to stimulate investment in new supplies. By the time of OPEC's May conference, Saudi Arabia was confident enough in a recovery to set its price aspirations at around $75/b, arguing that this would not derail economic growth.

Since then, Riyadh has consistently said the price average of $65-75 for paper WTI was good for both consumers and producers - encouraging investment and not crippling consumers.

Saudi Arabia has its own economic challenges at home which soak up oil income. The Saudi leadership, except for some self-styled hawks, is focusing more on deploying all the resources at hand to address growing domestic issues which could threaten the monarchy. Public spending is what is keeping the country on its feet and over 90% of the government's revenues are from crude oil exports.

The Saudis did not comment publicly when paper WTI briefly hit $82, but OPEC Secretary-General Abdullah al-Badri of Libya recently said that prices around $80 were "a bit high" given a weak world economy. He said OPEC might consider increasing output when it meets in December but only on condition inventories shrank, the world economy recovered more and prices continued to rise.