Behind the debate among Opec members on a reasonable price for their oil lies the urgent need among many of these oil-dependent nations to finance growing government expenditure in the face of rising unemployment and population growth.
Comments on Wednesday by Ali al-Naimi, the Saudi Arabian oil minister, that $25 a barrel was a reasonable price contradict his earlier statements and go against the views expressed by the majority of his counterparts in the Organisation of Petroleum Exporting Countries.
Domestic fiscal needs have made Opec oil ministers more vocal about raising the cartel’s price band from the current $22-$28 range, a line strongly supported by Venezuela, Nigeria, Iran, Kuwait, Algeria and Libya. Mr Naimi himself said in May that $35 was a reasonable level for US benchmark crude, which trades at a $3 to $4 premium to the Opec basket of prices.
Only two countries have resisted the need to justify higher oil prices: Qatar, which has one of the smallest populations and more diversified economies within Opec, and Indonesia, which is facing a growing import bill for oil.
Jeffrey Currie, managing director of global investment research at Goldman Sachs, said Opec members – apart from Iraq, which is not subject to production quotas, and Indonesia, because it is moving to becoming an net importer – need an average oil price of $30 over the next decade to finance domestic budgets. Goldman estimates that Venezuela needs an oil price of $50 a barrel to fund its government spending programme.
“[President Hugo] Chávez is spending like crazy. There is no way that his spending is sustainable, and it will have to come to a head soon through either less spending or more oil production, which will need to involve foreign investment,” Mr Currie said.
As for Saudi Arabia, Opec’s biggest producer, Mr Currie said that if the kingdom’s population continued to grow at the current rate of 3 per cent a year over the next five years, the price of oil would need to average at least $30 a barrel to keep per capita expenditure flat over this period.
“These countries will need to redirect a large share of cash flow into government spending programmes to support a rapidly growing population and pay down past debt, leaving very little to be invested in the [oil] industry,” said Mr Currie.
According to the Opec secretariat in Vienna, the population of Opec countries has risen from 410.4m in 1990 to 532m in 2002, an increase of almost 30 per cent – and economists estimate that unemployment in most of them is in double digits.
Samba Financial Group, formerly Saudi American Bank, in Riyadh, estimated male unemployment at 13 per cent. In Iran unemployment is around 15 per cent and in Nigeria it reaches about 25 per cent.
Muhammad Ali Zainy, senior energy economist and analyst with the Centre for Global Energy Studies, said the higher oil revenues were welcome to oil producing nations, but they would only delay any reform needed to open their domestic economies and create more sustainable jobs that were not dependent on the whims of the energy sector.
“Increased welfare spending is not the answer to the economic problems, they need a structural change in the economies and a diversification from depending on oil revenues,” said Mr Zainy.
The debate about higher oil prices comes at a time when Opec members are having the best export revenues since the early 1980s. The Energy Information Administration, the statistical arm of the US energy department, estimates that Opec net oil export revenues for 2004 will be $286bn (?231bn, £154bn) or 19 per cent above the 2003 level.
However, the EIA has warned that for Opec as a whole, per capita oil export revenues in current dollar terms are projected to be $530 this year, or less than a third of the $1,169 in real per capita oil revenues achieved in 1980.
Oil and gas export revenues still account for more than 80 per cent of total export revenues for Opec members, and provide the largest funding source for government spending.
Mr Currie said the greater budget funding challenges lay in the larger oil-producing countries with bigger populations such as Saudi Arabia, Nigeria, Algeria, Iran and Venezuela, many of which were either still closed to foreign capital or provided limited investment opportunities.
With all Opec members producing at capacity, except Saudi Arabia, which has about 1.5m barrels a day of idle capacity on top of its current output of 9.1m b/d, he said, oil prices were going to remain high. “Either they are going to have to let in more foreign investment or we are going to see oil prices remain high for a long time.”
