Saudis Pull the Stings as Crude Oil's Dance Gets Sloppy

June 20, 2012 9:09 AM EDT
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Members of the powerful Organization of the Petroleum Exporting Countries (OPEC) are split over how to manage oil (NYSE: USO) (NYSE: OIL) production. Despite a recent statement by the group that announced an agreement on the level of production, behind the scenes talks among the nations are believed to be heated.

Saudi Arabian Oil Minister Ali al-Naimi wants production levels to remain high. Some observers, including outspoken billionaire Donald Trump, believe that Saudi Arabia's loose position on production levels are a slap in the face to Iran, another large OPEC member. Iran will be hit with an embargo by the European Union effect July 1st. To compensate for the loss in Iranian production, the Saudi have ramped output to record levels.

Despite what might be seen by some observers as a slam on Iran, Saudi's position appears to be more pragmatic than political. Statements made by Naimi recently suggests that the Saudi's are very concerned that the crisis in Europe will derail growth throughout the world.

In Naimi's view, lower oil prices have a stimulative effect on growth in the eurozone. Stabilization there will be supportive of growth in the U.S., the world's largest oil importer. In other words, if the EU goes south, the U.S. and the world economy could go south, and oil prices will get slaughtered.

"Saudi Arabia has a difficult position," Chakib Khelil, former Algerian Oil Minister, said in an interview in London. "They have to decide when and how much to supply. They're looking at storage, they're looking at the Iran situation, at the world economy. It's a moving target, relying on a lot of information coming in, whether it’s Iran or Greece or the whole economy."

So, strangely, in the view of the Saudis, higher production is a way to keep oil prices stable over the longer term. After all, drug dealers don't earn money when their customers are in the hospital, and the Saudi's understand this form of logic very well. With this in mind, in the view of many industry insiders, countries like the U.S. shouldn't necessarily be going out of their way to thank OPEC and member countries like Saudi Arabia.

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