Amy Myers Jaffe Baker Institute Energy Forum
His Royal Highness Prince Turki Al Faisal Al Saud, former Saudi ambassador to the United States and Britain and a leading member of the ruling Saudi family, emphasized in a lecture recently at the Baker Institute that we live in a highly interdependent world. The key message of the Prince’s speech, which was titled “A Pillar of Global Stability: Saudi Arabia’s Petroleum Policy” was that both Saudi Arabia and major oil consuming countries were better off cooperating with each other on global economic matters than attempting to implement competitive or nationalistic zero sum economic strategies. In his lecture, Prince Turki conveyed important lessons about globalized trade and finance and about the impossibility that one nation could craft a policy where it can “win” in the global system by economically blackmailing its neighbors or trying to shield its own economy from the requirement to trade. This point is particularly salient for oil and the U.S. dollar, as discussed in my co-authored book, Oil, Dollars, Debt and Crises: The Global Curse of Black Gold.
Prince Turki made clear that Saudi Arabia was committed to “maintain” oil prices in the $70 to $80 a barrel range. Oil prices are now over $90 a barrel and the question is whether this price is a temporary blip or whether the oil market is in a serious upward trend to which Saudi Arabia will be challenged to respond. Another sustained run at $100 oil would likely bring with it some of the same kind of economic fall out as seen in 2007-2008: asset and financial market bubbles as petrodollars seek a place to be parked; slower recovery in job creation as businesses spend more on fuel and thereby have less money for capital investment and labor expansion; a renewed retraction in consumer spending in the United States; and slower economic growth worldwide.
Oil market speculators might have felt comfortable betting to the upside in late 2010 with the knowledge that King Abdullah of Saudi Arabia was in New York for back surgery. Saudi leadership succession issues always loom large in the calculation about future oil prices, and any chance of a change in leadership in the kingdom can boost oil prices at least temporarily. But the King’s “health” event revealed something that veteran Saudi watchers have always marveled at. The Saudi royal family has a remarkably consistent record for smoothly transferring power and avoiding sudden changes in policy – whether it be for a week, as in the case of the King’s recent recuperation, or more permanently –hence the Kingdom’s assertion that its system of government does not thwart its role as a pillar of stability in the oil market.
Saudi Arabia has stated decisively on numerous recent occasions and at the last two G-20 summits that it will do what it needs to do to keep oil prices stable. But Wall Street doesn’t appear convinced. It is recommending to its clients to buy oil as a hedge and as an investment. Perhaps that’s because from 2006 through early 2008, Saudi Arabia failed to act in time to restore sufficient stability to the oil market to prevent oil related pressures from exacerbating global financial problems.
That begs the question: Does Saudi Arabia have the will to show the financial markets its real power?
No matter the answer to the question, those betting on sustained high oil prices will eventually lose.
If Saudi Arabia proves there’s muscle behind its rhetoric, it has a wall of oil and a willingness to hold dollars to make its point that $75 oil is a sensible level.
If Saudi Arabia’s statements about its guardianship of stability are just words, rising oil prices will once again curb oil demand while taking steam out of the global economic recovery. And that will bring oil prices down too, but probably in a less orderly manner.