Painful trade-offs for a barrel of oil

Saudi Arabia has revealed that it is targeting an oil price of about $75 a barrel - a significant rise from the present $55 a barrel. Saudi leaders are arguing that marginal oil-producing countries need $75 a barrel to make the investment necessary to bring their oil reserves to the market.

In the past year, the oil price spiked to around $140, on the back of persistent concerns about the ability of oil-producing countries to meet demand.

Given the present price volatility, even major oil companies and oil-producing countries will think twice about making the investment necessary to secure supplies in the future, say some studies. A price of $75 would also make it easier for oil producers to ride out the global financial storm.

But at a time when the international economy is facing a crisis, higher oil prices may slow down a recovery, further reducing demand.

The Saudi target also makes it very likely that the Organisation of Petroleum Exporting Countries (Opec) will agree to cut production at its next meeting in December. Less production can mean less revenue for oil producers, even at higher prices.

The economics of oil is often about making painful trade-offs, because price is determined by what the market is willing and able to pay.