Bob Tippee

Oil prices will fall. The questions are when and by how much. And, oh yes, why.

Oil prices will fall when, in some combination, supply rises and demand drops. Dates and amounts? Nobody knows.

Confidence seems to be growing that crude prices won't plummet to $10-11/bbl again as they did in 1998. Economies of large oil-consuming countries so far have held firm against recent price leaps. Demand in China and India is surging.

The oil market thus has expanded in an apparently noncyclical way. Supply must struggle to keep up. While the crude price will fall again, therefore, it might not fall as far as it did in the last cycle.

So where's the new price floor?

The answer depends heavily on national accounts of key members of the Organization of Petroleum Exporting Countries. The price floor is wherever fiscal pain elicits meaningful production cuts.

Here, Saudi Arabia's fiscal affairs loom large. An analysis of them by the Centre for Global Energy Studies of London puts the critical price threshold at nearly $50/bbl for the OPEC basket of crudes.

In its March-April Global Oil Report, CGES says $36/bbl would cover likely Saudi expenditures in 2006 less nonoil income. If the kingdom wants to retire as much debt as it did last year, $37 billion, the target price rises to $49/bbl.

The group points out that public spending, nearly all funded from oil sales, has soared in recent years. Especially relevant to the "why" question are two categories.

More than half the growing Saudi budget goes for defense and specialized spending, such as for the war on terror. And education spending has risen to account for 26% of the total outlay, CGES says, "as Saudi authorities seek to improve the technical skills of the indigenous population and diminish somewhat the influence of the religious schools and universities."

Those would include the schools and universities notorious for producing young Saudi men knowledgeable about Islam, hateful of everything else, and unable to find gainful employment—young men inclined toward terrorism.

In some places, defense, education, and the price of crude are poignantly related.

(Online June 9, 2006; author's e-mail:

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