The Saudi energy policy is based on two principles: Maintaining moderate international oil prices to ensure the long-term use of crude as a major energy source and having sufficient spare capacity to stabilize oil markets in the short term. Being a long-term player in the energy world, Saudi Arabia views global energy markets from a very specific prism — it wants stability in the crude markets.

It does not want volatility. Saudi Arabia also boasts the largest proven reserves of oil in the world.

Kingdom realizes that in the long-term, high prices and extreme volatility in the crude markets could be detrimental to both consumers and producers. In recent years, Saudi Arabia has been stressing on fair and balanced prices.

The government says prices should ensure fair returns for the producers, and be conducive to required investments in the sector. At the same time should not be high enough to lead the global economy into depression. Moderation has remained the key to Saudi oil and energy policy for many decades now.

Saudi Arabia has thus been pursuing a stabilizing role in the otherwise volatile crude markets, which are peculiar in more than one sense. They are impacted by factors other than mere demand-supply fundamentals. Geopolitics, speculation, sentiments and others impact them in a big way and this makes the task of stabilizing these markets even more difficult.

The oil price that reached an all-time record of $147 per barrel in July 2008 fell to one-third of that figure following the economic crisis.

In a newspaper interview recently, Custodian of the Two Holy Mosques King Abdullah said Saudi Arabia always wanted the price of oil to stabilize. “In our view, $75 per barrel would be a fair price,” he said.

Minister of Petroleum and Mineral Resources Ali Al-Naimi said oil prices in the current band of $70-$80 a barrel are satisfactory. They are hovering around $80 a barrel now.

“Right now you see the price is OK, between $70 and $80. It’s close to the target we set, it’s almost $75 — it’s good,” Al-Naimi said.

Maintaining sufficient spare capacity has remained an integral part of Saudi oil policy. It has been the tool Saudi planners have used to soothe the sentiments of the markets in times of need. This spare capacity has been used many times in the past to overcome sudden supply disruptions. If Saudi Arabia did not act as it did then, oil prices could easily have hit the roof to say the least.

The Kingdom completed a massive crude capacity expansion project in 2009 to boost output capacity to 12.5 million barrels per day (bpd).

OPEC’s leading producer and exporter has around 4.5 million bpd of spare capacity, with production at around eight million bpd. That is well above the 1.5 to two million bpd the Kingdom sees as a safeguard against any surprise outage in global oil output. The Kingdom is also investing billions of dollars in refineries at home and abroad.

Saudi Arabia will continue investing in its oil sector to help stabilize crude prices at a level acceptable to both consuming and producing countries, Finance Minister Ibrahim Al-Assaf said recently.

“The Kingdom is continuing with its big efforts to achieve stability in the international oil market,” he said.

“This is through large investments to increase production and refining capacity to maintain balanced and acceptable prices for both producers and consumers.”

When Saddam Hussein’s forces entered Kuwait in August 1990, the energy world was all of a sudden faced with the grim reality of living without Kuwaiti and Iraqi oil for a considerable period of time. That would have left gaping holes in the global supply-demand balance. It was Saudi Arabia then that stood out in meeting this challenge.  A similar situation also arose in 2003 when the US attacked Iraq. All of the sudden, output worth two million bpd was lost from the markets. Again it was the Saudi spare capacity that came to the rescue of the world.

As recently as July 2008, when oil prices touched an all-time high of $147 a barrel, Saudi Arabia announced it was increasing its capacity to 12.5 million bpd to maintain the spare cushion so very essential to the market psyche. Indeed one cannot deny markets go by sentiments. In 2009 Saudi Arabia succeeded in raising its output capacity to 12.5 million bpd. This meant that in the backdrop of current depressed market conditions, Saudi output today stands at around eight million bpd. This means that around 4-4.5 million spare bpd are available to meet any emergency.

Al-Naimi has been reiterating for years that it is very expensive to develop and maintain spare production capacity, yet the Kingdom has chosen to do so in the interest of maintaining market stability.

In fact, Saudi Arabia has also identified a number of other development projects that if and when executed, could take the country’s production capacity to 15 million bpd. However, due to prevailing market conditions, those projects are on hold. These indeed can be implemented when dictated by market demand.

Saudi Arabia is also raising its voice against the rising aspect of speculative money entering and impacting the global crude markets.

When prices peaked in July 2008 to almost $150 a barrel, Saudi Arabia and other OPEC producers reiterated and underlined that it was beyond them to rein in the bull with speculative money taking refuge in oil markets, as in other commodities. Energy markets were not being controlled by demand-supply fundamentals, they maintained. Rather it was the speculative money that was holding the sway.

With the greenback under pressure then, speculative money was pouring into virtually all commodities — from food grains to oil. Hence prices were recording one spike after the other. Yet oil prices were definitely impacted the most, with the sector experiencing the most trade in the world.

Indeed not everyone initially agreed to the theory. Some argued it was mere fundamentals — lack of supply — impacting the markets negatively. Others went to the extent of claiming that peak oil has arrived or was just about to arrive and that the world was facing a calamity. At the Jeddah energy summit in July 2008, the then US Energy Secretary Samuel Bodman aggressively countered the argument that nonfundamentals — especially speculation — was to blame for the woes of the energy markets.

However, as time passed the reality started to sink in. Initial steps have already been taken by Washington to rein in speculative money distorting oil markets beyond recognition. Speculation is a recognized factor now and governments are slowly and gradually getting into the act to prevent it from transgressing beyond the permitted levels — at least at this initial stage.