There are several possible explanations for the reported fall in Saudi Arabia’s oil production in recent months. The official account is that the Kingdom is having a tough time finding buyers, according to the Saudi oil minister, Ali Naimi, via The Wall Street Journal (subscription required). In an interview after last week’s Opec meeting in Venezuela, Naimi said that his country’s crude production had fallen recently, which he says is a reflection of market conditions.
Nonetheless, when production slips in the world’s largest source of proven oil reserves, there is chatter about what’s really going on. Such is life in the pricing of a consumable good whose influence can hardly be overestimated on the global economy.
If Naimi’s line is correct, it would corroborate the prediction by others that the U.S. economy is slowing. As the world’s largest consumer of oil, even a marginal slump in America’s appetite for crude would necessarily have repercussions for Saudi production.
But there are competing theories in defining reality in the marketplace for the world’s most important commodity. For some, the slip in Saudi production of late is sure to give aid and support to the theory that a production peak is imminent in the Kingdom’s output. Matthew Simmons detailed this perspective in last year’s Twilight In The Desert: The Coming Saudi Oil Shock and the World Economy. Naimi’s latest comments only promise to stir the debate over peaking as it relates to Saudi Arabia.

Definitive answers, alas, are hard to come by in the world of oil. Indeed, deciphering what’s going on by watching prices alone remains as thorny a task as ever. Oil prices are at once a reflection of supply and demand forces and of geopolitical risk. Separating the influence of one from the other in an effort to recalculate the “true” economic price is more art than science.
With that in mind, it’s not clear if the latest run higher in oil prices reflects the realities of Saudi production declines, heightened supply risks via Iran’s latest threat to resuscitate the oil weapon, or some mix of the two along with all the other usual suspects that traditionally invigorate oil buying.
Whatever the reason, oil prices today moved above $73 a barrel in New York futures trading for the first time since May 15. The economy may be slowing, but it’s debatable if such a stumble will ease inflationary pressures sooner rather than later. Meanwhile, the prospect of higher oil prices will no doubt find an attentive audience at the Federal Reserve this week, which is struggling over monetary policy at the moment, particularly as it relates to the next FOMC meeting on June 28 and 29.
For the moment, the July Fed funds futures contract is hedging its bets about whether another interest rate hike is coming. Perhaps the bigger question is whether monetary policy for the foreseeable future is destined to reside in the hands of Fed governors or in the offices of political leaders in Riyadh and Tehran by way of oil pricing?