Saudi Arabia s oil strategy and its impact on global energy markets Professor Paul Stevens Distinguished Fellow, Chatham House Professor Emeritus, University of Dundee Visiting Professor, University College London (Australia) IEEJ Seminar Tokyo 12 th June 215
Presentation Outline A brief history of Saudi Arabia s oil policy Some recent changes to Saudi policy following the Arab Uprisings Reasons for current uncertainties over Saudi policy Chatham House The Royal Institute of International Affairs 2
A brief history of Saudi Arabia s oil policy Price moderation Tehran December 1973 The DOHA split 1976 The swing role 1974-198 Resumption of the swing role 1981-85 The summer of 1985 ' o o o b / d 4 35 3 25 2 15 1 5 - Oil production 1965-213 1965 1969 1973 1977 1981 1985 1989 1993 1997 21 25 29 213 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 1979 198 1981 1982 1983 1984 1985 Rest of OPEC Saudi Saudi Arabia's swing role 1979-1985 Non-OPEC Rest of OPEC Saudi Arabia Chatham House The Royal Institute of International Affairs 3
Some recent changes following the Arab Uprisings The price norm since 2 has been volatility However between Jan 211 and June 214 16 Monthly spot prices WTI 2-Mid May 215 14 Monthly spot prices WTI 211- June 214 12 12 $ per barrel 1 8 6 4 2 $ per barrel 1 8 6 4 2 Chatham House The Royal Institute of International Affairs 4
The recent market developments The input of geo-politics Price stability is rather surprising given the Arab Monthly spot prices WTI 211- June 214 Uprisings Changes in production Dec-21 to Mar-214 $ per barrel 12 1 8 6 4 2 thousand b/d 35 3 25 2 15 1 5 Geo-political Losses Egypt Yemen Sudan Syria Iran Libya Chatham House The Royal Institute of International Affairs 5
The recent market developments Why the price stability? Gains offset losses BUT key role for Saudi Arabia balancing the market Changes in production Dec-21 to Mar-214 35 3 25 thousand b/d 2 15 1 5 USA Egypt Yemen Sudan Syria Iran Libya Losses Gains Chatham House The Royal Institute of International Affairs
The recent market developments Why the price stability? Gains offset losses Key role for Saudi Arabia balancing the market Changes in production Dec-21 to Mar-214 35 3 25 thousand b/d 2 15 1 5 USA Egypt Yemen Sudan Syria Iran Libya Losses Gains Chatham House The Royal Institute of International Affairs
The underlying problem was OPEC s dilemma Governments need a high price to survive But this leads to demand destruction And increased Non- OPEC supply This was unsustainable* US$ per barrel 16 14 12 1 8 6 4 2 OPEC Median Budgetary Break- Even Price Source: Ali Aissaoui Apicorp Economic Commentary Vol 9 N. 78 July- August 214 * As predicted: See Paul Stevens & Matthew Hulbert, Oil prices: energy investment, political stability in the exporting countries and OPEC s dilemma. Chatham House Briefing Paper, October 212 Chatham House The Royal Institute of International Affairs
Demand destruction Note high prices since 25 14 Annual average prices (Brent 213 US$) 198-213 Demand disappointing in 214. Partly because of an income effect. 2 1 3 12 1 BUT there is also a price effect leading to demand destruction. China and India removing subsidies on domestic prices U S $ p / b 8 6 4 2 198-86 1987-24 25-21 211-213 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 Chatham House The Royal Institute of International Affairs
Increased Non-OPEC supply Courtesy of the shale technology revolution = horizontal drilling + hydraulic fracturing US output rose from 5.5 mnb/d in 21 to 9.4 mnb/d in 215 1 9 8 7 6 5 4 3 2 1 US CRUDE OIL PRODUCTION 21-24 Tight Oil Conventional Oil 21 215 22 225 23 235 24 Source: EIA Energy Outlook May 214 Note the data points are five yearly intervals Chatham House The Royal Institute of International Affairs
If continuing oversupply cannot be stored, must be sold at lower prices What happened next? Dramatic rise in inventories 12 118 US crude oil stocks 211- April 215 Saudi begins to cut production during summer 214 BUT then remembers their previous swing role In early September 214 they stop cutting and conspiracy theories rule! ' b a r r e l s 116 114 112 11 18 16 14 OPEC 27 th November meeting launches prices into a competitive market for first time since 1928 12 1 EIA Website 18 April 215 Chatham House The Royal Institute of International Affairs
Growing over-supply = from June 214 price collapses Some recovery after January 215 But not clear on what basis, given inventories continue to rise Geo-politics back again: Saudi Arabia in Yemen? $ per barrel 12 1 8 6 4 2 Monthly spot prices WTI 211-Mid May 215 Many talking up the market? Chatham House The Royal Institute of International Affairs
Presentation Outline A brief history of Saudi Arabia s oil policy Some recent changes to Saudi policy following the Arab Uprisings Reasons for current uncertainties over Saudi policy Chatham House The Royal Institute of International Affairs 13
Reasons for current uncertainties (1) New King and the next generation Market share strategy is new Claiming the success of the strategy BUT it is too early to tell given: Demand uncertainty The current fracklog Changes to the price elasticity of supply Chatham House The Royal Institute of International Affairs 14
Reasons for current uncertainties (2) Changes to the oil sector institutions and other future changes? Next Oil Minister? Pre-Salman there were two candidates But Khaled Al Falih moved to Health Ministry and Abdul Aziz Bin Salman as a Royal??? Moving Saudi Aramco away from the Oil Ministry? Council of Economic Development Affairs Supreme Council of Saudi Aramco replaces the Supreme Petroleum Council Possible scenario = splitting Oil from Energy? But in reality probably little change to the underlying policy! Chatham House The Royal Institute of International Affairs 15
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