When Saudi Oil Minister Ali Al-Naimi said last week that Saudi Arabia was satisfied with the prevalent oil market scenario and “the current prices are fair with no justification to take measures to either decrease or increase production,” it generated ripples all around. The industry took it as a signal of Saudi support for raising the current OPEC target price band of between $22 and $28 a barrel.
“The organization has tacitly lifted the lower end of the OPEC price band from $22 to $25-$26 and left prices above $30 per barrel,” Joseph Stansilaw, president of Cambridge Energy Research opined.
The Saudi message means that, “given the strength of current fundamentals and the capacity needs of the oil market in the future, $35 is not considered a high price,” said Paul Hornsell of Barclays Capital.
The Financial Times carried a story on the issue in its edition of June 30 under the title, “Saudis flag support for higher oil prices.”
All this once again brings to fore the issue of what the real price of oil should be? There has been a constant debate in the oil fraternity on the issue.
When the oil prices are seen in real terms — inflation adjusted — they do not seem to be much high. Added with the question of exchange losses, the issue becomes more pertinent for all the oil producers. There have been suggestions for the oil producers, even in recent past to switch over from dollar to euro, or at least to a basket of currencies, for the oil revenues.
This definitely has political overtones and cannot be overlooked. Some analysts do strongly believe that Saddam’s downfall was hastened by the fact that he had announced switching over to euro from US dollar, as the currency for Iraqi crude trading. An issue of muscle politics indeed!
Thus when Naimi and indeed some of his other colleagues within the OPEC spoke of the current prices as satisfactory, they definitely had the real, inflation adjusted value of their product in mind. Most of the oil producing OPEC members require to maximize their returns, so as to meet their current needs including the piling security outlays in these days of disturbances and instability. According to Deutsche Bank, “it would be wrong to assume that the current nominal oil price is extreme”.
“Indeed, in real terms, prices are only 6 percent above their 1971-2003 average,” the bank says. Prices are high relative to the recent past, but only at the levels last witnessed four years ago.
The Times in its one of the recent issues reported that if the current crude prices are adjusted to US inflation, it needs to rise to about $80 a barrel to be as expensive today in real terms as it was in 1979. In terms of the UK inflation, this figure is to be nearer to the $120 a barrel.
Although OPEC oil export revenues over the past three years have been significantly higher than during the oil price collapse of 1998-99, they remain, in inflation-adjusted, per capita terms, far below peaks reached in the late 1970s-early 1980s.
OPEC net oil export revenues for 2003 are now estimated at around $240 billion, up 23 percent from 2002 levels. For 2004, OPEC net oil export revenues are forecast at $285 billion, up 19 percent compared to 2003 levels.
OPEC net oil export revenues in real (inflation adjusted) terms are currently running about 60 pecent-70 percent above average annual revenues for the 1990s, but remain below the high levels seen from 1974 through 1985.
In real terms (constant $2004), OPEC revenues peaked in 1980, at $556 billion. OPEC’s worst revenue year in constant dollar terms since the early 1970s ($90 billion in 1972) was 1998, when revenues fell to only $120 billion, slightly below the previous low revenue year of 1988 ($121 billion in earnings), following the oil price collapse of late 1985-early 1986.
In inflation adjusted terms, OPEC per capita oil export revenues are far below the peaks reached in the late 1970s-early 1980s. For OPEC as a whole, per capita oil export revenues (in constant $2004) are estimated to have reached $456 in 2003, up 19 percent from 2002, but just one-fourth the $1,691 per capita revenues achieved in 1980. For 2004, per capita revenues are expected to reach $530, still less than one-third of per capita revenues in 1980.
