A Fair Price for Oil? $85, Says Former Aramco Exec

Sadad Al Husseini, the former head of exploration at Saudi Aramco, says the United States shouldn’t hold its breath for $45 oil again.

"Eighty-five dollars is probably a very fair price," he said in an interview on Squawk Box this morning. He added that dropping the cost of oil below $85 could kill alternative energy supplies, like ethanol and biodiesel.

There are two things that determine the price of oil, according to Husseini.

"There's a structural factor: the cost, the difficulty of extracting oil from older fields, the reserves getting depleted...The other factor has to do with what we're seeing: the speculation, the concerns about security, the volatility. That’s probably adding 20-plus dollars to the barrel of oil today. So it should be lower, but on the other hand, these are the realities of the market. There's a lot of volatility due to non-oil-related issues."

It costs around $9 to extract a barrel of oil, but Husseini says much of the profits get plowed back into the energy industry.

"Part of that margin that we're talking about has to finance all the new facilities that are being built, and currently the total capital program that this oil is carrying is over $80 billion in Saudi Arabia alone, so that’s a massive investment. The Middle East Gulf region is investing over $700 billion in oil and refineries upstream."

The marginal cost of extracting oil, says Husseini, could easily double or triple over the next 20 years.

"The areas where there are oil basins are pretty well-known, and the balance of oil, we've used about half the [proven] oil reserves. There's another half left out there. The balance is in smaller pools, more mature fields, very deep offshore arctic regions. All of these are very expensive areas, and that will carry the base cost up."

Oil Refinery
Oil Refinery

OPEC isn't expected to increase production at their next meeting, but Husseini says even if they did, it wouldn't get more oil into the gas tank.

"There are several factors that determine how much oil that gets out of the ground gets into the gas tank, and definitely the refineries are one of the ceilings. Today we're pretty much at peak capacity as far as refineries are concerned."

When asked how the United States could satiate its appetite for oil, Husseini offered the following advice:

"The biggest future oil for the U.S. is conservation, it's more energy efficiency, it's rationalizing the way energy is used. You can save a lot more that way than by just plain discoveries. You need every source of energy you can get, whether it's ethanol or biodiesel or otherwise, but conservation is probably the best solution in the short term."