For example, the growth of shale oil has made the United States one of the three largest producers of oil, along with Saudi Arabia and Russia. And with increased energy efficiency, US oil imports fell by a third. Slowing global growth has led to stagnation and decline in demand for oil in the EU. Since oil is quoted in dollars, the strengthening of the US dollar has not made oil cheaper for Europe.
But in the analysis of the oil market by the characteristics of economics, religion, and politics, we must remember that its main beneficiaries are the four kingdoms of the Persian Gulf: Saudi Arabia, Qatar, Kuwait, and the UAE. They account for half of the oil revenues of OPEC countries. Since 90 percent of the economy of those countries is provided by migrant workers (mostly from East Asia), the economy of these countries also depends on its state.
It is quite clear that the main influence, both in OPEC and the world oil market, is possessed by Saudi Arabia, and so it is worth taking a close look at the kingdom’s oil policy, the more so since recently there the king became a new representative of the House of Saud. In late February, for example, the price of Brent crude oil reached a new maximum for 2015 on the statements from Saudi Arabia about increasing demand. The closing maximum was 62.5 dollars per barrel, with an intra-day high of up to 62.61 dollars. Earlier, Saudi Oil Minister Ali al-Naimi said that the markets are calm now, and the demand for oil is increasing gradually. All this gave rise to Petromatrix analyst Olivier Jacob calling this change of tone one of the main drivers of growth in world oil prices. “No more talk of $20 from al-Naimi,” said the oil analyst.
At the same time, Saudi Arabia has reduced oil exports in 2014 by 5.7% to an average of 7.11 million barrels per day, or the lowest level since 2011. These data stem from the Joint Oil Data Initiative (JODI). Meanwhile, the Saudi oil corporation Saudi Aramco, the largest oil exporter in the world, is in talks with banks on raising a loan of $10 billion. With these funds Saudi Aramco wants to finance new acquisitions and other investments, according to the sources of Bloomberg.
Nevertheless, Saudi Arabia is lowering the prices for March delivery of oil to Asia, offering a maximum discount of up to 14 years. It lowered the official deliverable crude oil prices of Arab Light by 90 cents, and now the price of Arab Light is $2.30 lower than the major brands of oil in the Middle East. Previously, a member of the Saudi royal family, Prince Al-Waleed bin Talal Al Saud, in an interview with USA Today, said oil will never again cost $100 per barrel: “If supply stays where it is, and demand remains weak, you better believe it is gonna go down more. But if some supply is taken off the market, and there’s some growth in demand, prices may go up. But I’m sure we’re never going to see $100 anymore.”
Explaining the reason for the fall of oil prices, the Saudi prince drew attention to the simultaneous presence of two problems: oversupply and lack of demand. At the same time he called the theory that the US and Saudi Arabia have decided to keep oil prices low in order to put pressure on Russia “rubbish”. According to him, Saudi Arabia would not do this under any circumstances, because Saudi Arabia is now suffering as well as Russia. The Saudi government with great fanfare announced its intention to become by 2017 the second country in the field of oil, which in turn will put additional pressure on the oil industry because the market will not only enjoy cheap raw materials, but also petroleum products.
According to the Vice President of the North American Association NACSSA and Vice President of Fearn Oil Inc. Michael Moore, this will be an additional challenge to the Russian and American producers of “black gold”. According to the Wall Street Journal, the focus on the refining of crude oil is part of Saudi Arabia’s new strategy of economic development. The publication refers to the statements by Oil Minister Ali al-Naimi. The capacity of refineries around the world is 4.9 million barrels per day. The USA is the largest supplier – in 2013 is supplied 2.6 million barrels per day, writes the WSJ.
Russia in 2013 ranked third in oil refining after the US and China. Russian refinery capacity by the end of 2012 amounted to 770 thousand barrels per day (279 million tonnes per year), according to the magazine “Drilling and Oil”.
“We are no longer limited to exporting crude oil,” said A. al-Naimi at a press conference in the port city of Jazan (south-west Saudi Arabia), where it is planned to launch two new plants. The plants will be able to start working at full capacity in 2017, said the minister. According to the minister, the plants will process up to 800,000 barrels per day.
This will increase the capacity of oil refining in the country up to 3 million barrels a day and “make the kingdom one of the five largest countries in the world in terms of refining capacity of crude oil and the second largest exporter of refined oil after the United States,” the minister was quoted as saying.
But it will be manifest only in the future, and now because of falling prices Saudi Aramco is seeking to reduce costs through a variety of sources, from forcing contractors to more profitable contracts on servicing oil wells, to discussing offering discounts on their phone calls, according to sources familiar with the situation within the company. The company, which is the largest oil producer in the world, is also planning to cut its spending on exploration and production by 25%, almost like a private oil company, the sources noted.
“Like everyone else, we’re using the downturn as an opportunity to sharpen our fiscal discipline,” said CEO Khalid Al-Falih during the Forum in Davos in January.
“We’re cutting on a few things that we could cut, but we’re as committed as ever to our long-term strategy.” Saudi Aramco already postponed for a year plans to build a plant worth $2 billion, and froze plans for the development of deep-water oil and gas fields and deep-sea drilling in the Red Sea, as now the profitability of such projects is a big question, said a source familiar with the situation.
These measures demonstrate the risks faced by the company after OPEC decided in November not to cut oil production quotas so as not to reduce its stake in the oil market amid falling oil prices and the emergence of a new competitor in the United States as a result of increased production from the shale gas revolution.
The decision of the OPEC countries, on which Saudi Arabia basically insisted, had a negative impact on the major oil companies such as Royal Dutch Shell PLC and Chevron Corp., but at the moment the situation affects the national oil companies of these countries. Not only is the revenue to the state treasury reduced, but the state-owned oil companies of OPEC countries are also cutting their budgets. But in this respect it is worth paying attention to the substantial cash curtsy of Riyadh towards Washington, which testifies to the inextricable link between the two states.
Just recently it was announced that the leadership of Saudi Arabia sent a request to the US with a list of warships supposedly much-needed by the Kingdom totalling over 16 billion dollars. The Iranian newspaper “Khorasan” sarcastically asked – where will so many warships go, probably not in the Saudi desert of Rub-al-Khali?
However, we must pay attention to factors that could buoy the price of oil. The most important: demand may rise faster than current expectations due to US GDP growth, faster growth in the EU, and the current rate of about 7% in China. Further supply will not increase as fast as established by the market: many promising projects are unprofitable to develop at a price below $100. Finally, the growth in demand for fuel in China and India will not stop, as they will continue to develop infrastructure, in particular to build roads and stimulate the production of cars at the expense of budgetary funds.
Originally published by New Eastern Outlook.
Victor Mikhin, member correspondent of RANS, exclusively for the online magazine “New Eastern Outlook”.