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Page added on June 23, 2015

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Effect of Saudi Arabia Decisions on Global Crude Oil Supply & Demand

Consumption

The Kingdom of Saudi Arabia exerts more influence on the global price of crude oil than any other nation state. Oil analysts study Saudi policy and politics with as much attention to detail as financial analysts spend on US Federal Reserve meeting minutes. The current confluence of dramatic changes external and internal to the Kingdom merit examination. Any immediate internal policy shift or external geopolitical force that changes Saudi production affects global supply. Long term Saudi production and consumption trends influence how the world will use hydrocarbon energy.

What drives Saudi crude oil policy today?

Saudi Petroleum Minister Ali al-Naimi justified his veto of OPEC output productions on November 27, 2014 because it was “crooked logic” for low cost producers to sacrifice market share to support crude oil prices, a position reiterated at the June 5, 2015 OPEC meeting. Analysts looking for motives beyond maintaining market share have discussed three strategic drivers: 1) King Salman’s accession to the Saudi throne on January 23, 2) the growing geopolitical unrest surrounding the Kingdom, and 3) the accelerating innovation of North American shale operators.

How much oil can Saudi Arabia produce?

The Saudis state that the Kingdom can produce as much as 12 million barrels a day, a fact often repeated in the media. Paleo geology gifted the Middle East with a plurality of the earth’s oil and natural gas reserves. The US Central Intelligence Agency (CIA) lists the Kingdom as the 2nd largest source of proven crude oil reserves after Venezuela, with close to 269 billion commercially recoverable barrels as of January 1, 2014. Peak oil skeptics who predicted five years ago that the Saudis were running out of oil have been proven wrong.

How will internal politics affect Saudi crude oil production?

While King Salman’s decision to separate the Saudi Petroleum Ministry from Saudi Aramco has not changed crude oil production, Saudi consumer expectations and demographic change portend increased domestic consumption yielding less net crude for export. The Kingdom currently is a net importer of gasoline and diesel and continues to burn a substantial amount of crude oil to produce electricity.

Saudi efforts to diversify its economy from oil have not yet met projections. The recent decisions to open its stock exchange to foreign investors may induce greater economic diversity and cultural freedom to engender entrepreneurial innovation. Successful economic diversification would allow less concern about Saudi crude oil market share and more focus on long-term price stability.

Saudi social stability

Journalist Karen House argues in her work On Saudi Arabia that young Saudi Arabians will demand change as their generation emerges as a political force. Some analysts attribute the Kingdom’s decision to spend a record $229 billion with a 5% deficit despite lower per capita oil export revenues. While the Kingdom currently enjoys substantial currency reserves increased military and domestic spending could cause future larger budget deficits which leaves less bargaining room for long-term supply contracts with Asian and other buyers willing to take advantage of discount prices in the spot market.

Geopolitical Tension in the Persian Gulf and Arabian Peninsula

Saudi Defense Minister Mohammed bin Salman has reacted to the current tension throughout the Persian Gulf and Arabian Peninsula with an unprecedented military intervention in Yemen. Unclear is what threat, if any, ISIS may present. Any destruction of significant Saudi petroleum infrastructure by terrorist act would likely cause an immediate increase in the risk premium built into the global price of crude oil.

How Saudi decisions affect North American fracking

Whether the Saudi decision to hold production at its current level was meant to drive out North American unconventional competition is a matter of debate. The successful innovation and efficiency practices deployed by North American operators are not a matter of debate but of public record. Nimble operators are now using continuous improvement to produce more unconventional oil and gas with less capital investment than previously possible in the shale revolution.

Conclusion

While King Salman’s accession, the growing geopolitical unrest in the Arabian Peninsula and Persian Gulf and the accelerating innovation of North American shale operators all indicate reduced Saudi future influence on global crude oil markets, the current reality is that no other country yet controls the global supply to the degree wielded by the Saudis. Unless crude demand growth suddenly exceeds previous expectations, Saudi production decisions remain immediately market relevant for the near future.

Forbes



10 Comments on "Effect of Saudi Arabia Decisions on Global Crude Oil Supply & Demand"

  1. shortonoil on Tue, 23rd Jun 2015 8:58 am 

    “Saudi Petroleum Minister Ali al-Naimi justified his veto of OPEC output productions on November 27, 2014 because it was “crooked logic” for low cost producers to sacrifice market share to support crude oil prices, a position reiterated at the June 5, 2015 OPEC meeting.”

    Our Model has been projecting a long term decline in price for over a year:

    http://www.thehillsgroup.org/depletion2_022.htm

    If the Saudis agree with us (and apparently they do) they will pump every barrel as fast as possible before the price declines further. The Saudis realize that they not only have to deal with the depletion of their own fields, but also with the depletion of every other field in the world. It now all boils down to the last man standing!

    Ali al-Naimi is correct, sacrificing low cost producers to support higher cost producers will only result in shortages. Economics 101 is no longer the prevailing hypothesis. The thermodynamics of petroleum production are now in control.

    http://www.thehillsgroup.org/

  2. BobInget on Tue, 23rd Jun 2015 10:10 am 

    Shortonoil and Forbes utterly neglect to mention Saudi Arabia, along with the US,
    are committing genocidal bombing in Yemen.
    Fact

    Speaking of consequences.
    Saudi Arabia’s policy of over extending water-flood production has serious long term
    risk.
    Fact

    Elements within Saudi Arabia are supporting so called Islamic States.
    Fact

    Like Confederate flags on US Statehouse
    grounds, absolute monarchies have no place
    in a modern, 21st century society.
    Fact

    Saudi Arabia is using oil domestically, for waging war to be sure but also to cool private and public buildings in record breaking heat.
    Fact

    Such ‘oversights’ are hardly unintentional nor insignificant.

    Oh, the next (stable) price point will be $70.

    http://www.livecharts.co.uk/MarketCharts/crude.php

  3. jjhman on Tue, 23rd Jun 2015 11:13 am 

    “Peak oil skeptics who predicted five years ago that the Saudis were running out of oil have been proven wrong.”

    I do remember some fantastic analyses some years ago which included satellite photos of Saudi oil fields and stratigraphic(?) cross sections of Ghawar showing “evidence” of near term depletion of the world’s largest oil field. I’m still impressed with that work yet wonder if it meant anything in the short, intermediate or long term.

    I read here recently that Ghawar is still producing the bulk of Saudi oil. Biggest or not, that field has to deplete like every other oil field in the world. The question is when. And will other developments, such as fracking, deep water or whatever render the depletion of Ghawar moot. And will I live long enough to see it?

  4. HARM on Tue, 23rd Jun 2015 11:46 am 

    “…Saudi consumer expectations and demographic change portend increased domestic consumption yielding less net crude for export. The Kingdom currently is a net importer of gasoline and diesel and continues to burn a substantial amount of crude oil to produce electricity.
    Saudi efforts to diversify its economy from oil have not yet met projections…”

    –Huge majority of population is under 30, the official unemployment rate for them is as 30%, and the ones that do have jobs mostly work for… you guessed it, the government.
    –The entire population is basically living on the King’s largess (the source of which is of course oil), receiving checks directly from the government and many indirect subsidies, which greatly incentivizes waste and actively discourages conservation.
    –That same population of restless youth has been heavily indoctrinated (brainwashed) by the Saudi government in an extremely fundamentalist, violent and misogynistic version of Islam –Wahabbism.
    –Assuming current trends continue (likely due to population pressure and the un-scalability of renewables in the timespan required), domestic consumption will consume 100% of oil exports well before mid-century (hello, Export Land Model – ELM).
    –Belated, underfunded and clumsy late entry into the renewable energy field.

    Gee, the future sure looks bright for the KSA!

  5. shortonoil on Tue, 23rd Jun 2015 12:26 pm 

    “Gee, the future sure looks bright for the KSA!”

    About half of Saudi production comes from one field, Ghawar. The water cut as reported by Aramco reservoir engineers is now around 50%. It is simple math to calculate how much of Ghawar’s 350 foot oil seams remains. Ghawar is undoubtedly over 90% depleted. Without Ghawar’s production there is no way that the House of Saudi will be able to placate its teaming 28 million people. If Saudi Arabia goes to pieces it can be expected that so also will the entire Middle East. The world is now buying minutes from a dying Super Giant!

  6. Davy on Tue, 23rd Jun 2015 4:20 pm 

    Short, I is funny how simple math is so hard to understand when the implications are so profound.

  7. antaris on Tue, 23rd Jun 2015 4:35 pm 

    Short or Rock, could you give us a brief lesson on water cut please ?

  8. Dredd on Tue, 23rd Jun 2015 4:42 pm 

    Oilah Akbar! Oilah Akbar!

  9. Nony on Tue, 23rd Jun 2015 5:51 pm 

    Bob, the article has a whole section about geopolitical risks and mentions it in other places as well. You just skimmed it too fast.

    “Analysts looking for motives beyond maintaining market share have discussed three strategic drivers: 1) King Salman’s accession to the Saudi throne on January 23, 2) the growing geopolitical unrest surrounding the Kingdom, and 3) the accelerating innovation of North American shale operators.”

    [note thesis number (2), a major part of the article]

    “Geopolitical Tension in the Persian Gulf and Arabian Peninsula

    Saudi Defense Minister Mohammed bin Salman has reacted to the current tension throughout the Persian Gulf and Arabian Peninsula with an unprecedented military intervention in Yemen. Unclear is what threat, if any, ISIS may present. Any destruction of significant Saudi petroleum infrastructure by terrorist act would likely cause an immediate increase in the risk premium built into the global price of crude oil.”

    [A whole section, with a bolded title. Notice that the article is rather negative on Saudi actions in Yemen.]

    “Conclusion

    While King Salman’s accession, the growing geopolitical unrest in the Arabian Peninsula and Persian Gulf and the accelerating innovation of North American shale operators all indicate reduced Saudi future influence on global crude oil markets, the current reality is that no other country yet controls the global supply to the degree wielded by the Saudis.”

    [geopolitical risk again mentioned in conclusion para.]

  10. BobInget on Thu, 25th Jun 2015 9:29 am 

    For detailed explanations about how stuff works I always try Wikipedia first. (water cut)
    This time, Wiki disappointed .
    Instead I went to http://www.glossary.oilfield.slb.com/en/Terms.aspx?LookIn=term%20name&filter=water%20cut

    From what I’ve gathered:

    About water cut; once started, it can’t be stopped. Water-cut can end suddenly, without much warning. One day, only brine comes up.

    Youtube: https://www.youtube.com/watch?v=jSMNZhdUSy0

    (more then you really want to know)

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