Saudi Arabia Warns Oil Market: ‘Will Not Allow Itself To Be Used By Others’
Khalid Bin Abdulaziz Al-Falih, Saudi Arabia’s energy and industry minister, speaks during the 2017 IHS CERAWeek conference in Houston, Texas, on Tuesday, March 7, 2017. (Aaron M. Sprecher/Bloomberg)
Saudi Arabia’s energy minister, Khalid al-Falih took the stage to deliver the keynote address at IHSMarkit’s CERAWeek conference in Houston and delivered a stern warning to investors about the future of the oil market.
He has no doubt that global demand for oil will continue to climb, particularly in the developing world. Long-term supply, however, is in jeopardy. Although the oil market is oversupplied right now, he is “most troubled by lagging progress in long-cycle development projects needed to provide the base-load of future supplies.” He fears an industry-wide drop in the development of long-term oil resources. This will lead, he warned, to a future marked by severe price spikes, “acute energy poverty” in the developing world and high market volatility.
The cause, he admonished, are “misguided” projections of peak oil demand. It is problematic, in his mind, that some in that some in the industry think demand will only decrease long-term. . If investors make decisions based on false forecasts of peak demand, he warned, then underinvestment in oil will compromise global energy availability.
Workers tend to a well head during a hydraulic fracturing operation outside Rifle, in western Colorado. (AP Photo/Brennan Linsley)
Saudi Arabia is not fooled by the exuberant return of short-cycle investment in shale oil and neither should the market. “Regardless of what you might hear elsewhere,” al-Falih said, Saudi Arabia, “Welcomes the return of investors to U.S. shale.” His government has always taken a long view of investment in the energy sector and is continuing to invest and plan accordingly, but he would “love to see some of that [global] investment in short cycle projects shift to long term.”
He had another stern warning to fellow OPEC and non-OPEC producers. Saudi Arabia, he said, is still undecided as to whether the so-called historic OPEC and non-OPEC production deal should be renewed for another six-month period. In other words, other producers should not assume that Saudi Arabia sees continuation of the production cuts as in its interest. The cuts may be abandoned.
Vienna – OPEC press conference at which the organization’s 2017 oil production cuts were announced. November 30, 2017. (author’s collection)
“Depending upon our assessment of the first half of the year we will decide with our partners what to do in the second half,” he said. He is pleased with the overall adherence to production cuts, but reminded the industry that the 1.8 million bpd total reduction is “not huge compared to the size of the market.” Saudi Arabia has, so far, cut beyond its quota. The Saudis, he warned fellow producers, will not continue to shoulder the bulk of the cuts while some participants “have not lived up to expectations.” In a direct message to “free riders” This [agreement] is for the benefit of all and needs to be achieved by contributions of all.”
Specifically, Al-Falih said that Russia’s oil production cuts, a centerpiece of last November’s OPEC—non-OPEC deal, were not good enough in February. His reprimand did not go unnoticed by his Russian counterpart, Alexander Novak. In a CNBC interview after his speech, al-Falih said that Novak had just assured him that Russia is in the process of decreasing its production. Novak told Al-Falih that Saudi Arabia would find that Russia’s cuts during the first week of March were much better.
Al-Falih’s admonition to OPEC and non-OPEC oil producers who joined the production deal is clear: Get in line or Saudi Arabia will use its considerable market influence to drop the bottom out of the oil market. The question is not whether Saudi Arabia has the ability to make good on its threat – its production capacity of 12.5 million bpd and distribution lines to Asian markets make that clear. The question is whether al-Falih has the will to flood the market with oil if Russia, Iraq and Iran fail to live up to their promises come May.
Ellen R. Wald, Ph.D. is a historian and scholar of the energy industry. She writes and consults on the intersection of geopolitics and energy.