From CBS….

Saudi Arabia reportedly needs to sell oil for at least $55 dollars a barrel to cover the cost of running the country. Fossil fuels finance 75 percent of the country’s entire domestic spending budget, but oil is selling for below that breakeven price.

This metric is a little misleading. Saudi Arabia needs to sell a certain amount of oil at $55 dollars a barrel to fund their country. I have never seen anyone say what that amount is, but the point is an important one to remember. It is the reason that OPEC has little real pricing power in an economic downturn.

In theory OPEC can raise the price of oil just by cutting production. In fact, Saudi Arabia could do this all by themselves if they wanted to. The problem is that a price rise is not enough solve many oil producers funding problems . To keep from going broke, a lot of oil producing countries (Iran, Venezuela, Russia, among others) need a rise in the price of oil without demand destruction. In the current environment, that is a quite a trick to pull off.

That is why when Iran and others scream for OPEC to cut production they really mean that they want Saudi Arabia to cut production. They have no intention to cut production themselves. The Saudi oil minister Ali Al-Naimi makes this very point later on in the article saying….

“Iran tries to keep the price way up; and Venezuela’s trying to keep the price way up. You don’t consider that oil as a weapon?” Stahl asked.

“If you looked at these countries you just named, every one of them would like to sell every barrel they can,” Al-Naimi commented.

“At as high a price as they can get away with,” Stahl remarked.

“Right,” Al-Naimi said.

As a result of these kinds of games, I don’t see OPEC cuts as being very successful at raising the real price of oil anytime soon no matter what headline cuts they announce. Oh sure, the price might jump up and down some, but I don’t think you will see a sustained rise anytime soon (short of a war occurring).

However, in the long term, the real price of oil is going to rise. Simply put, if Saudi Arabia can’t support itself at the current price, no petro state can support themselves. That means that a lot of petro states are going to go bankrupt in the near future. Iran and Venezuela are in a particularly weak position with Russia and Mexico not far behind. The resulting chaos will drive prices back up. It may even drive them way up.

So enjoy the cheap gas you are going to get for the next year or so. It will not last.