Introduction Oil prices have been a wide issue because of the discrepancies when it comes to its distribution, inconsistent prices and other related factors which play a significant role for the world market. From the 1980s up to the year 2000s, the inflation accustomed the prices of a barrel for just $25/barrel and eventually increased up to $60 by 2006. The increase in oil prices is due to the factors that largely attributes the world market activities. United States Department of Energy reveals that the petroleum reserves, the tensions in the Middle East and oil price speculation are now declining. During a period of time, there are specific geo- political events and natural disaster which are not directly linked to the global oil market and there is only short term impact on oil prices. Hence, this makes the oil prices to be inconsistent (Rutledge, 2005). What happens in political affairs and natural disasters are not actually explicitly linked to the global oil market like the tension that happened in Israel and Lebanon. Recession instead is seen to be the major cause of the inconsistent oil prices which really have a great impact in every country. Knowing the roots of these issues should detail out important topics and should start from the world‟s largest oil-producing country which is the Kingdom of Saudi Arabia. Initially, Saudi Arabia dominates the export of petroleum in the world. It saves the economy of Saudi Arabia and its oil accounts for almost majority of the percentage of the exports and 1/3 are almost for the government revenues. The country is also called an energy superpower just like Russia. When oil reserves were discovered in 1938, it gave Saudi Arabia an economic prosperity and a good deal of leverage in the international market. However, as the
world market and market demands increase, oil prices are very much affected specifically when the main country is also affected by the global crisis that is happening. Extensive understanding of the gas price in Saudi Arabia is very much important in order to emulate the effects and other significant factors that may largely affect the world. Particularly, comprehensive writings should also be scoped with regard to the issues that relates to Saudi Arabia as it prevails to have the most important role in the oil prices issue. Saudi Arabia: the world’s largest petroleum exporter The economy of Saudi Arabia obviously relies on its oil exports and the industry is composed of about 45% of the country‟s Gross Domestic Product (GDP). It has 260 billion barrels of oil reserves that takes 24% of the total petroleum reserves of the world. The government of KSA tries to build up the progress in the private sector through the privatization of industries like the telecom and power. They have proposed plans such as initiating the privatization of electric companies during the year 1999 that followed the privatization of the telecom company. However, water shortage and fast growing number of population may hold back the efforts of the government to add autonomy in agricultural products (Bailey, 2008). Saudi Arabia has experienced an important tightening of oil revenues that are put together with a soaring rate of population growth. The country‟s Per capita income fell from $11,700 during the oil boom in 1981 down to $6,300 in 1998 and current increase in oil prices have helped improve per capita GDP to $17,000 in 2007 which is also $7,400 accustomed for inflation. It has also set off anther oil boom that pushes Saudi Arabia‟s budget surplus into $28 billion during the year 2005 (Bourland, 2008).
Somehow, OPEC restricts the oil production of its members according to their proven oil reserves. This implies the idea that more reserves you have, the more the OPEC will allow a member to produce oil for the world market. The proven reserves of Saudi Arabia have revealed some alterations since the start of 1980 taking account of having an increase of 100 billon barrels in the midst of 1987 and 1988. It has been suggested by Simmons (2008) that Saudi Arabia is largely overstating on its reserves and sooner or later may affect on production declines. In order to expand the economy, Saudi Arabia introduced a new city located on the Western Coast with the investments that exceeds $26.6 billion. The new city has a port where in it is recognized as the biggest port of the Kingdom. It has made a lot of innovations which also made the Kingdom to be a member of the World Trade Organization in 2005. OPEC OPEC or the Organization of Petroleum Exporting Countries is an organization composed of Saudi Arabia, the United Arab Emirates, Venezuela, Qatar, Nigeria, Libya, Kuwait, Iraq, Iran, Ecuador, Angola and Algeria. One of the main goal of OPEC is to determine the best way of protecting the interests of the organization in an individual manner and generally as well. It trails the means of guaranteeing the stabilization of the prices in the international community taking account the perspectives of screening the harmful and unimportant fluctuations. Also, concerning about the interests of producing nations all the time and the significance of securing a stable income for the producing countries are also included in the goals of OPEC. In addition to, regular supply of petroleum to the consuming nations are given importance in the objectives of OPEC (Ovendale, 2004).
As the major organization handles the oil produces, the impact of OPEC on the market has been very much disparaged. A lot of members of the organization influences the world and sets off high inflation on both developing and developed countries when oil stoppage has been experience in the oil crisis that happened way back 1973. The authority of OPEC in manipulating the oil price has somehow decreased because of the successive discovery and development of wide oil reserves in Mexico, North Sea, Russia and the market modernization. Global oil prices have been strongly impacted as the members of OPEC became open with regard to the issue of probable conversion of the cash reserves to the Euro from the standard US dollar. In 2008, oil was traded below the price of $85 on New York Mercantile Exchange which in response, OPEC declared that it will be able to meet the following month. The decisions of OPEC influenced the international prices of oil. Taking for account the scenario where in the energy crisis in 1973, it made OPEC to decline in shipping oil to western counties which had backed up Israel in the Yom Kippur War. The decline brought an increase in the oil price that lasted for five months, initiating in 1973 until the following year. It was then agreed by the OPEC nations to increase the price of the crude oil b y 10% which at that time, OPEC nations were comprised of newly nationalized oil industries (Ovendale, 2004). They have participated in the new international economic order to be started by the coalitions of main producers. Consequently, the first OPEC summit, they aimed for steady and fair prices of commodities, democratization of the economic system, international food and agriculture program and the transition of technology from the North to South. Generally,
the results give an idea that OPEC reveals to be an alliance for accepting the output rationing to be able to maintain the price. Considering the fact that the international market is widely dominated by the US dollar, the changes that are happening in the value of USD compared to other world currencies largely affects the decisions that the OPEC settles into the issues of the amount that they should produce. Just like for example, the failure of dollar because of other currencies, the member of OPEC may have smaller revenues and in other currencies for their oil which causes sensible cuts in their ability to purchase. Discussion Analysis of gas price in the last 5 years (2004-2008) Gas price in the last five years has been inconsistent. During the middle of 1980s up until the 2003s, the inflation adjusted price of a barrel broadly costs $25 per barrel, which is in NYMEX. The beginning of 2004 gave the price of more than $40 and $50. A progression of events made the prices to go beyond $60 by the year 2005 and then goes $75 per barrel in the midst of 2006. The prices then turned down to $60 per barrel in the early part of the year 2007 just before going up $92 per barrel on the same year and rise up to $99.29 on December of the same year. The first half of the year 2008, oil prices are usually listed for its high price. It even reached $103.05 per barrel on the second month of 2008. In the middle of the year, prices hit $141.71 per barrel which is observed to increase in just four months. According to the reports, “The most recent price per barrel maximum of $147.02 was reached on July 11, 2008. After falling below $100 in the late summer of 2008, prices rose again in late September. On September 22, oil rose over $25 to $130 before settling again to $120.92, marking a record one-day
gain of $16.37. Electronic crude oil trading was temporarily halted by NYMEX when the daily price rise limit of $10 was reached, but the limit was reset seconds later and trading resumed. By October 16, prices had fallen again to below $70, and on November 6th oil closed below $60” (Bourland, 2008). Specifically, in 2004 as a result of the Iraq War that followed the 2003 attack of Iraq, the capacity of oil production of Iraq was shortened from more than three to two M barrels per day. In 2005, after moving back for quite a lot of months in late 2004 and early 2005, oil prices reach its new prices in March 2005. Prices that have been imposed on NYMEX have been over $50 per barrel since March, 2005 and apparently increased into $55.17 and closes at $56.46. After a month though, the price began to decline with $53.32 and overturned to a rate to $58.28. This is due to the impact of frail dollar. The beginning of 2007 paved the way for increased oil prices which basically fell into the expectations of having a relatively high rate of $90.02 in October, 2007. These increases are accountable for the conflicts between the eastern Turkey and the decreasing power of the U.S dollar. Oil prices are went down for quite some time with the hopes of increased U.S stocks. But, prices are still rising again up to the peak of $92.22. According to the reports, “Prices increased throughout late October and early November. On November 7, 2007 light crude oil reached another record, closing at $98.10 per barrel. On November 21, 2007, oil prices rose to a new high of $99.29 per barrel, leading to fears of the price breaking the $100 per barrel” (Ovendale, 2004). Because of the unfavourable United States dollar, oil price have continuously reached its high rates. Accordingly there have been reports that “The OPEC on March 5, 2008 accused the United States of economic "mismanagement" that it said is pushing
oil prices to record highs, rebuffing calls to boost output and laying blame at the feet of the George W. Bush administration. Oil prices surged above $110 to a new inflationadjusted record on March 12, 2008 before settling at $109.92. Oil continued its soar skywards; hit $111 a barrel, on March 13, 2008, before sliding back to below $110 amid fears of economic recession in the United States.” (Bailey, 2008). In addition to the reports give, “The record was again broken on March 17, 2008, with U.S. light sweet crude reaching $111.80. On April 15, 2008 the price of oil broke the $114 mark for the first time. The price increased to $115.07/barrel on April 16, 2008 due to the increasing weakness of the U.S. dollar, and increased again to $117 per barrel on April 18, 2008 after a militant group in Nigeria said it had attacked an oil pipeline. Oil prices rose to a new high of $119.90 a barrel on April 22, 2008, before dipping and then rising $3 on April 25, 2008 to $119.10 on the New York Mercantile Exchange after a news report that a ship contracted by the U.S Military Sealift Command fired at an Iranian boat” (Ovendale, 2004). It is very obvious that the prices are not set to a particular rate which largely depends on a lot of factors in the economy. USD greatly influences the determination of prices as well as the economy of the oil producing countries. Actually, the price of producing petroleum did not come to its peak. The increases of prices have overlapped with profits for the oil industry. Considering the meeting that happened in 2007, it is more likely to reveal a desire of a stable price though it is quite high. This is considered because it would give enough income for the oil producing countries. However, this also attributes to the factor that it would help to avoid negative impact for the economy of oil consuming nations. This implies a balanced trade between the producers and consumers of the oil market in the world.
Putting a highlight on the major oil exporting countries are quickly developing and taking for consideration that countries use more oil as their own local product; less supply of oil is more likely to come out in the international market. With this regard, it became effective to lessen the oil that is available for trading that causes the prices of oil to be on its higher rate. Thus, for the last five years, oil prices have been significantly on its price inconsistency which resulted to be at its peak. Generally, prices reveal varied shifts and its roots are mainly from the state of the oil producing companies.
(The gray line indicates the nominal price while the black is the real one from 20042008)) Before the year 2009, prices of oil had fallen to $110 and even lower which is said to be because of the demand reduction in the world. It is also revealed that the oil market had been drastically changed in the year 2008 as it was not anymore related to the natural disasters. Indeed, as prices fell below $110 in some of the markets, OPEC was prompted to look after the $100 price level. During the last months of the year 2008, the prices gave continued to emerge with the global demand growth. OPEC then planned to lessen their production of oil by 2.2 million barrels a day although they
admitted their declaration of lessening production in October which only has a compliance rate of 85%. As countries are experiencing economic recession, the prices continued to slide. The fall of prices reached $60 per barrel and the International Energy Agency prompted that the fall of prices nay result to the shortage of investment in new sources of oil and a fall of production of a more costly unconventional reserves (Rutledge, 2005). The major economist of IEA said that "Oil supplies in the future will come more and more from smaller and more difficult fields," Bjornland (2001) which basically depicts that the production in the next years will need more investments each year. Not having enough new investments for the planned projects could apparently result to a more serious supply issues than what has been experienced in the first years of 2000s. For the reason that the declines for the sharpest production had been visible in the developed countries, IEA said that the biggest growth for the production was assumed to be from the smaller projects in OPEC states which may raise the world production share from 44% to 51% from 2008 to 2030, respectively. It has also been highlighted that the demand from the developed world may have also reached its highest rate; hence the future demand growth was likely to come from the developing nations like India, China and the Middle East (Bailey, 2008). However, there are researchers that argue with the propositions of IEA in determining the hardships of increasing production even with a great increase in investing for the exploration and production, most especially for the developed petroleum regions. The reasons for the changes in the oil price a. Monetary Inflation
For an economist, monetary inflation is widely accepted as the way of differentiating the direct inflation in the supply of money. The description for this term can be the link between the actual mechanism and the relationship of price and monetary inflation (Bjornland, 2001). There is a debate with regard to the relationship of demand and supply for this issue though, and is more likely to affect the money which pertains to the USD as it prevails to be the main currency used in trading oil. The price of oil is relatively influenced by the value of the US dollar. This has resulted to the consideration of some economists that the main point of gaining from the sale of oil may be unable to find value in the future if the currency loses its value (Bjornland, 2001). Through the comparison of the oil price in different currencies with the fluctuations in the exchange rates of the currencies, it is defined that the oil price is not essentially connected to the value of the dollar than to any other currency (Bjornland, 2001). This depicts the comparison of oil price to gold price and also oil price has been negatively associated to the value of the dollar since the 1970s. This also says that the oil price greatly influences the value of dollar and the value of dollar as affects the oil price (Hammes and Wills, 2005). As the economies of developed countries largely depend in the transportation, petrochemical feedstock and in the agriculture industry, the links would influence the values of currency. There are some analysts that holds on to the idea that the price of $25 during the mid- 2008 prices and had an increased for almost around $140 are because of the devaluation of dollar. b. Financial Speculations Speculations for the finances exist when the investors risk for the future purchases. This means that financial speculations happen when an investor is willing to
purchase something for a future delivery for a certain price. The maturity of the contract may be apt to the original customer or may be settled through paying for cash. A lot of outstanding economists have disputed that financial speculation is not really a reason of rising oil prices; nevertheless more than a few assertion have been made incriminating financial speculation as the most important cause of the increases in price. In 2008, the transport chief for Germany's Social Democrats anticipated that 25% of the increase to $135 per barrel had nothing to do with the fundamental supply and demand. Indication was provided to a U.S. Senate committee in May which says that the demand shock from Institutional Investors had been raised by 848 million barrels for the last five years, which is the same to the increases in demand from that of China. According to Bjornland (2001), oil prices should be analyzed properly in order to straighten out the effect of oil price shocks from the demand and supply shocks. But, an approach in tolerating the ideas of shocks like the monetary disturbances in driving inflation can be used, with the consideration that the shocks are unbiased output in the future. In May 2008, an article pointed out that the oil future transactions on the NYMEX almost reflects the price of oil increases for a many periods of year, though however the article accepted the idea that the increased investment might follow the rise of prices. Generally, the probability of the financial speculators falsely inflated the oil market, the U.S. Congress started on hearings in June 2008 in order to find out if actions have to be restricted on the pension funds, investment banks and other investors that are said to trigger the prices up.
Michael Levy (2008) wrote in his article that, “There has been no shortage of gas at any filling station for the past 10 years yet prices are up 1200% because of futures trading going out more than eight years. Even the Saudi oil minister has recently stated the price of a barrel of oil should be no more than $70.00. Demand from China and India is still far less than that of the USA. The Chinese stock market is down 50% signifying a sharp slow down. This news still is not enough to stop the wild speculators hiking the oil prices”. Significantly, Levy is correct because there really has no shortage of the oil so spectators should not say that oil price increases due to the tightening that happens in the world market. In addition to, if the oil prices was restricted and are sold for only $40- $80 per barrel, then this obviously means that a shift for the prices is possible depending on the supply and demand. This may be fair thinking that if there are lots of supplies; prices do not have to go down $40 which will still give a just profit to almost oil industries. When the oil is in a short supply, the price would be restricted to a ceiling of $80 which is more than acceptable to the world market (Levy, 2008). Researches about the oil market have been conducted and it was released which have said that the speculations do not really impact the market heavily. It stated that more than %60 billion was put in oil during the first six months of the year 2008 that helped in triggering the price per barrel from $95 to $147 per barrel. c. Demand and Supply Demand and supply are largely seen to be the most important factors for the changes in oil prices around the world. The demand for the world crude oil increases 1.76% per year with its maximum percentage for 3.4 during 2003-2004. EIA have reported that “drops in petroleum demand due to high prices have been observed in
developed countries and are expected to continue, a 3.7 percent rise in demand by 2013 is predicted in developing countries. This is projected to cause a net rise in global petroleum demand during that period” (Ovendale, 2004). The growth of demand is seen to be the factor which is typically seen in the developing world but United States is the largest consumer who uses petroleum. As the demand of the US goes higher, consumption of the petroleum takes the big portion of oil supply in the world market. For other countries, as they develop, the industry, fast urbanization and higher standard of living attributes for the use of oil. Prosperous countries like China and India are rapidly consuming more oil as their economies emerge. Oil consumption in China increased by 8% every year starting 2002 and in 2008, auto sales in China were assumed to increase by as much as 15-20%. This was upon the economic growth rates of more than 10% for 5 years. In addition to, another vital factor on the petroleum demand is the population growth. Taking for account the population of the world, because the growth of population is faster than the oil production, it reveals that the production per capita have reached a very high rate in 1979. Price increases are seen to be slow in the growth of oil supply. This factor contributes mainly to the changes of oil price and has been persistent since the production of oil is covered up by the new discoveries in 1980. Considering the fact that the global oil production will turn down for some instances which will lead to minimize the supply is the major long-term cause of rising prices of oil. Fossil fuel is also restricted and the residual available supply is used more often in each year. The available reserves have become more technically hard to dig up and thus this appears
to be more costly. Apparently, the reserves will be sufficient to the economy in pulling out at exceptionally high prices. It is regarded that the prices could go on to increase for the foreseeable future until a new market balance is reached where in a supply point persuades the demand of the world (Hammes and Wills, 2005). Even though there is a controversy when it comes to the timing and form of oil, there are still people that accept the ideas of production which is reasonable. However, it is noted that before the prices of oil increased in 2008, some commentators have said that the awareness for global warming and new sources of energy basically depicts that the demand may fall before supply which makes the diminution of reserves not an issue anymore. In addition, commotion in the Middle East most especially Saudi Arabia, the world's largest oil-producing region, it has influenced the trading to lessen exports. This is largely seen in the civil unrest in Iraq after the invasion in 2003. Venezuela also has experienced the strikes and political turmoil and a growing volatility in West Africa exists. The impact of recent economic crises on gas price in Saudi Arabia Arguments with regard to the effects of the economic crisis on the gas price in Saudi Arabia. Some says that an oil- price spike can make a recession which is comparable to the 1973 and 1979 energy crisis. Perhaps, this time would be a worst situation like a global crash. Petroleum prices that are increased are sometimes visible through a large number of products that are from petroleum and also like those shifted using petroleum fuels. High oil prices from the 2000 until the 2008 primarily suggested a financial crisis which is reflected on the start of 2008 (Reynolds, 2005).
In Saudi Arabia, the impact of economic crises made the country to embargo oil production and its effects are seen easily. OPEC required the oil companies to add payments radically and the price of oil had been four times larger by 1974 for about $12 per barrel. The increase in the oil price had actually striking effect on the nations who export oil as well. For the Middle East countries, which are categorized to be under the industrial powers are now taking the administration of an important commodity which is oil (Mouawad, 2007). The usual flow of capital inverted as the oil- exporting nations gathered huge assets. In fact, some of the income was handed out in the form of assistance for the other underdeveloped nations which has an economy that had been caught between higher prices of oil and lower prices for their own export commodities (Reynolds, 2005). Also, raw materials in the middle of lessening Western demand for their goods are being experienced. However, a lot of massive arms are adopted by the Middle East which just aggravated the political tensions. The member of the OPEC in the developing world suspended the viewpoint of nationalization of the holdings of the companies in their countries. Much importance is given to the Saudi Arabia which has acquired the operating control of Aramco. With this regard, it has been fully nationalized in 1980 under the administration of Ahmed Zaki Yamani. Saudi Arabia having much profits, have taken different proposals for an ambitious five-year development plans that begun in 1980 also known as the expenditure of $250 billion. Other members of the cartel eventually took major economic development programs as well (Mouawad, 2007). The long term effects of the crisis are generally depicted. According Ovendale (2004), “Despite efforts by the Arab states to use the "oil weapon" to display Western
energy vulnerability and the futility of maintaining a heavy-handed pro-Israeli policy, it can be argued that the Arab states ultimately traded diplomatic gains for ever-increasing dependence on the West for economic and military security. The sharp reaction by the United States, Western Europe and Japan, the Soviet Union, and the influx of new oil wealth, had dire effects for the Arab states in the years following the 1973 Yom Kippur War and OPEC embargo. Prior to the embargo, the geo-political competition between the Soviet Union and the United States, in combination with low oil prices that hindered the necessity and feasibility for the West to seek alternative energy sources, presented the Arab States with financial security, moderate economic growth, and disproportionate international bargaining power”. Actually, as the global crisis gets serious it does not affect Saudi Arabia as much as it affects other oil consuming countries in the world (Hammes and Wills, 2005). The global economic crisis might have a helpful impact on the Saudi economy because of the decline in the prices of the commodities caused by the international economic dilemma, and noted that stability of prices is one of the most important goals of the Saudi economic policy. The growth may optimistically make a way realize about a lot of goals which includes balance in regional development, improvement of the payments balance at the long term and also making job opportunities available. The economic crisis in industrial countries somehow affects the demand on oil in Saudi and this is where the economic crisis impacted the country. The economists focused that the economy of Saudi has enough foundation in order to survive the current crisis. The importance of the coordination between the economic officials in Saudi Arabia and other
countries to make good proposals to deal with the impact of the global financial crunch has been put on a highlight as well. Indeed, there is no country in the world that is free from the effects of the financial crisis and recession. Saudi Arabia has totally changed the focus of economic policy from the control of inflation up to the restoration of confidence in the financial sector (Reynolds, 2005). It is assumed that oil prices will importantly be lower than the preceding lessened production and it will intensify the impact on oil revenues. The finances for the local and foreign companies that make the businesses in the Kingdom will be less available and more costly. Growth on the economy will slow down as problems of accessing the price of finances and lower oil revenues blocks the project implementation and lessen confidence. Lower oil revenues may somehow mean the end to a large budget and recent account surpluses of the current years. The prices of the commodities and the strengthening of the country‟s currency, riyal, may cause inflation for the next years. Thus, the main economic data will look pathetic in 2009 compared to the previous years. But, this does not say that the economic boom is over. Vitality in the local economy has been pushing the economy forward for the last few years and people think that the healthy growth scenarios in the non-oil sector will be able to maintain even though at a slower rate than what has been declared. Preparing for the decrease of the project pipeline should put off some marginal projects from being undertaken and spread the remainder over a longer period that will help alleviate some of the bottlenecks that have developed throughout the economy (Ovendale, 2004). Oil Revenues and Industrialization
A consequence for the changes in the oil industry over the past years has been in the center of attention and it primarily points out to the industrial development of the oil producing companies. Through the conformist ideas, the most important obstruction to industrialization amongst Third World countries has been a harsh lack of capital through the foreign exchange reserves (Rutledge, 2005). For the point of view of the oil producing countries, the sprint of revenue to their national accounts materializes to take away this restriction. The Shah of Iran shows that the country is becoming a major industrial power in just a few decades. Saudi Arabia proclaims though that a five-year development plan which will cost $142 billion is at hand. Oil producing companies boasts for their successful future due to the plans for industrialization which has the foundation of having increased oil revenues. For the industrial countries such as United States (Rutledge, 2005), the panorama are treated explicitly as the set up of a new era that visions a more productive economy and a better standard for living. This is basically dedicated to the oil producing countries and exceptional opportunities for getting higher corporate sales and investments in the process. Inflation made Saudi Arabia one of the few places where large investors are making a comeback. The concept that oil revenues should be used in order to develop and branch out an economy for the producing country is not actually new, specifically among drastic nationalist political forces in the oil producing states and especially the Arab world in general (Bairol, 2007). With regard to the questions of determining the price and national restriction of resources, questions about the leadership on the industrialization was greatly considered by radical nationalist regimes in countries such as Iraq or
Venezuela. These countries possess ratio of oil reserves to production and were quite in the line of shrinking and hence have to think of the not-too-distant day for success. Oil revenues therefore are focused on the production of oil producing companies and largely accounts for the demand of the industrial users which are also the largest oil consumer companies in the world (Rutledge, 2005). The optimal gas price in Saudi Arabia in 2009 Talking about the most favorable prices of gas in Saudi Arabia for the current year would basically pinpoints that the kingdom is still the lowest cost producer of oil in the world. However, a definite description should be made in order to define a low cost which will be focused on and at a certain period of time. Years have passed and the country is undeniably referred to as the lowest cost producer of oil in the world for the reason of they have already settled for the fields. The only expenses that apply to the country are the operating expenses in order to pull out the oil. With that consideration, Saudi Arabia does not pay or they are not charged for the energy that they consumes like the electricity and water. It can be said that nowadays, false costs are prevailing in the market. As observed, it was announced that Saudi Arabia will be putting up $50 billion in 2008 and 2009 jus to try and form a million and a half barrels. But considering the notion that if they are charged with the water and electricity that they are using, cost of oil will actually still go high as oil production is not really at low cost at all. Hence, what prices involved in this matter does not really reveal the exact costs and expenses that they have used and this somehow appears to be fabricated (Rutledge, 2005). Estimation of the costs for oil production can just fall into the rate of $10-20 per barrel taking for account the free usage of electricity and water. Actually, there have
been a lot of issues accompanying the optimal gas price in Saudi Arabia which directly affects the world market for oil. It is also believed that Saudi Arabia has additional capacity of oil reserves. However, some commentators say that if they have a spare capacity can not be categorized with what the country has, it is just an oil reserve that can give out as much oil as it can and not for a heavy production of oil for the whole. The relationship of Saudi Arabia and OPEC is also an important factor to consider for the determination of oil prices. It had been distinguished that Saudi Arabia largely differs from other oil exporting countries as to what OPEC regards. The differences are said to reflect the social political bases of the regimes which also have their different social resources and the origin of the alliances with the industrialized capitalist and large oil corporations. The fundamental Saudi position, as pronounced by oil Minister Zaki Yamani was actually not new to all anymore. In retrospect, the occasion of the previous OPEC hike in 1975, Yamani left the negotiations for “consultations” with his government. He refused to agree with the 10% hike but consequently the Saudis quietly implemented the hike. And this scenario can be depicted towards the decisions of Saudi Arabia for their gas prices, they dominate the pricing issues and implement the prices for without the consultations of other oil exporting countries, thus this makes the oil prices to be fictitious (Rutledge, 2005). Saudi Arabia has been the financer and main backer of an “American Solution” and felt that the time was right for the signal that would oblige the new Carter organization to shift rapidly on this front. Considering the open communication for Saudi and US, the shift revealed the identity of views which basically depicts similar perspectives for the oil matters. The shift for Saudi is the aspiration of the regime in
maintaining its influence within OPEC, principally on the question of pricing and related issues regarding the details of finances for determining the price (Mouawad, 2007). Saudi Arabia is not concerned in harshly throbbing the economies in the regimes on Iran and Kuwait for the reason that it will not press on the confrontation that far. In the end, the ones who will benefit the price difference will be the giant companies that control the international market and not directly the consumers.
(The gray line indicates the supposed price while the black is the real one from 20042008) As of January 2009, oil prices have settled for a price of $37 up and do not have a stable position in the market. It was higher than the previous prices revealed but Saudi Arabia had made big cuts for determining such prices in order to respond to the global crisis. The settlement of the news and reports with the prices are relatively affected by the global oil demand. A need to comprehend with the recession and emerging global economic crisis should be considered though by the oil exporting
countries to help reduce the crisis being experienced by the people. According to the Reuters (2009), “OPEC's secretary general said the cartel may cut oil output further at its meeting in March if the market remains oversupplied a month from now. OPEC agreed to cut supply by 2 million bpd at meetings in September and October”. Though oil prices have increased costs, Saudi is said to be cutting off it prices for the consumers. Reuters (2009) added that “The EIA revised down its 2009 world oil demand forecast by 200,000 barrels per day (bpd) on Tuesday, calling for consumption to fall by a total of 810,000 bpd this year compared with 2008 levels”. Conclusion It is very much important to consider that the economic and political progressions in the Middle East are always related with the perspectives of political and economic issues globally. In particular, the ideas and policies of the prevailing industrialized countries specifically Unite States has helped to set the restrictions of industrial development for the Third World. A single characteristic formulation of that point of view can be the idea that a major Western interest in the underdeveloped countries is the interest for increasing the sources of primary products and increasing the markets for industrial exports (Levy, 2008). A good Western strategy would set up the major tool and procedures available to the industrial countries like for example the public and private capital exports, technical assistance, and many more. For some techniques that can maximize the efficiency of assisting the independent underdeveloped countries for the adaptation of policies that are in their own interest for a long term period. Also, it is favorable to the development of primary production for export to countries like Western Europe, Japan and North America.
The discussion for the most optimal oil prices in Saudi Arabia reveals the changes in oil prices as it is affected by the economic crisis happened for the past few years. It had been widely impacted by the factors such as the money inflation, speculation and supply and demand for oil. Accordingly, developed and
underdeveloped countries are also affected through the prevailing perspectives of the commentators as they act as either the oil producers or the oil consumers. Hence, the main highlight of these changes is given to the global economic crisis that is happening in the world today. The cause and effect of oil price changes in the world market are largely felt by the consumers as they are the main market of the oil and are just controlled by the large oil corporations. Even though Saudi Arabia is full of issues with regard to the price determinations of oil and relative details should be discussed in order to clarify the grounds between an industrialized country like US and Saudi Arabia, and Saudi Arabia and OPEC. Gas prices should then be fair enough for the world market and comprehend with minimizing the costs in order to help underdeveloped countries and thus balance the related costs and expenses. $10- 20 per barrel per se is seen to be the costs and expenditures of Saudi Arabia for the oil production , they should make the oil available for the oil consuming countries a just and fair price which would maintain the supply and demand for this commodity. This is to diminish the disparity in world market because global crisis does not really affect the economy of Saudi Arabia; in fact they still emerge in the market because they are the main source of oil in the world which is known to be one of the main goods that the countries need.
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