May 27, 2024

Reuters Breakingviews: S.&P. States the Obvious

S. P.’s shift on Monday to a negative outlook on the country’s AAA credit shouldn’t come as any surprise. But it should provide a reality check.

S. P. doubts that President Obama and Congressional Democrats and Republicans are capable of reaching a meaningful agreement to rein in deficits, which it believes could push the nation’s debt load above 90 percent of gross domestic product by 2013. And even if they do reach agreement, there’s nothing to stop lawmakers from reversing course in the future.

Markets, which should be well acquainted with America’s ugly fiscal situation, took the news on the chin. Stocks initially fell around 2 percent while the yield on the 30-year Treasury bond spiked as much as 0.11 of a percentage point. However brief, there’s a chance such a jolt could help refocus the myopic obsession of many investors on short-term performance with the somewhat more distant but still real challenges.

Austan Goolsbee, a White House economic adviser, called S. P.’s decision a political judgment. But the heart of the rating firm’s reasoning is that without decisive action, America will soon look measurably sicker in financial terms than other AAA-rated countries and it will be increasingly difficult to justify its top rating.

Unfortunately, the Federal Reserve’s current ultralow interest rates make doomsday predications seem abstract, even to supposedly rational market players. That’s even more true inside the Beltway, where budget dogma on both sides of the aisle still persists instead of a pragmatic assessment of revenue and spending — and the communication to voters of the hard realities — that should be under way.

S. P. and its peers would hate to cut America’s rating. That would fracture the bedrock on which the debt world has rested for decades. But S. P. is right to up the ante. Any lawmakers living in Washington’s spendthrift past should perhaps heed the lyrics of “Once Upon a Time,” the song one participant reported hearing while waiting on hold for the credit rater’s conference call: “How we always laughed, as though tomorrow wasn’t there.”

The ‘Fair’ Price for Oil

The rulers of Saudi Arabia have long thought they could tell what a “fair” price for oil should be. Before the unrest on its borders, the country repeated its long-held view that the figure was $70 to $80 a barrel.

A recent pledge for a huge increase in spending on everything from housing to the religious police, however, is pushing Saudi Arabia to its largest budget. No wonder it now thinks that the market is “oversupplied,” as Saudi’s oil minister, Ali al-Naimi, said this weekend. What’s “fair” may prove more costly.

The kingdom will need an average oil price of at least $80 a barrel to balance its budget during 2011, according to various estimates. This is one of the highest break-even prices within the bloc of six Persian Gulf nations.

Supply disruptions in Libya, a country that produces a type of sweet crude that Saudi Arabia cannot easily replace, and the threat of similar problems erupting elsewhere, have pushed prices well above Saudi Arabia’s needs, to around $120 a barrel for Brent crude and $110 for West Texas Intermediate crude.

It is not in Saudi Arabia’s interests to keep prices so high that they threaten the global economy, irk Western allies and provide incentives for developing alternative fuels. But if higher spending becomes a new norm and the kingdom wants to avoid taking on new debt or eating into its foreign reserves, then it must adjust its view of what’s fair.

The previous margin between the country’s break-even requirements and its stated price target suggests a fair price closer to $90 to $100 a barrel. But even if spending comes down later, higher price expectations will be supported by another domestic factor: the country’s explosive growth in domestic oil consumption.

Speculation has long swirled about the longevity of Saudi Arabia’s reserves. Record spending and its own oil consumption, which amounts to about 15 percent of production by some estimates, suggest that domestic issues will probably force it to shift its consideration of what’s “fair” to something closer to $100 a barrel. Importers should take note.


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