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Energy Insights: Energy News: A kingdom fit for an oil price ordeal

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A kingdom fit for an oil price ordeal



Roula KhalafRoula Khalaf

Arab man standing next to gas burning off from oil well

Saudi Arabia has been showing that in hydrocarbons only the fittest keep market share

Arab man standing next to gas burning off from oil well

new battle is breaking out in the Middle East as 2014 draws to a close. Thankfully, no blood will be spilled in its name, and no widows and orphans will be left in its wake. It won’t involve lost territory or stranded refugees. And it won’t be fought over religion or ideology.

More than a conventional war, though, it represents a fundamental struggle for the future of the Middle East, and for its place in the world.

I’m referring to the tussle over oil, the resource that provides the region with its strategic underpinning. There might be more than oil in geopolitical considerations of this troubled region — but there is nothing more important than oil.

Leading the charge into battle is Saudi Arabia, the world’s largest exporter and long-time leader of the Opec cartel, which is fighting for its status as king of hydrocarbons. Maintaining this position is crucial not only to the economy of the kingdom, but also to its role as the Gulf powerhouse and the west’s main strategic Arab ally.

Saudi Arabia proved unwilling or unable to arrest the slide in oil prices in recent months, and debate has raged over Riyadh’s motives. Was it deliberately contributing to the depression of prices to devastate the economy of its regional rival, Iran? Was it engaged in an American-Saudi ploy to intensify the pressure on Russia?

Neither, as it turned out. Saudi Arabia has not abandoned its traditional policy of separating oil strategy from foreign policy, even if it is likely to relish the secondary effects of its behaviour on states with which it disagrees.

For Riyadh, something more vital is at stake. In keeping with the more assertive attitude it has shown in the past year, it is taking a big risk on lower oil prices, in the hope of preserving its market share in a world of weakened oil demand and growing supply, particularly from the US shale boom.

After a long and mysterious silence, Ali Naimi, the veteran oil minister, made clear just before Christmas that, in refusing to cut production without a similar move by non-Opec producers, Saudi Arabia was trying to prove to the world that survival is for the fittest.

And the fittest in this case is the kingdom, which has the lowest cost of production, but also low debt and massive foreign exchange reserves of more than $700bn.

Not only was Saudi Arabia defending its market share, he told the Middle East Economic Survey newsletter; it was also declaring that “high efficiency producing countries are the ones that deserve market share”.

Mr Naimi has solved the riddle about motives. But he has kept open a series of other mysteries, the clues to which will drive the oil price and determine whether Saudi Arabia’s gambit pays off.

Walid Khadduri, a former editor of MEES, says Mr Naimi has nerves of steel and a determination to follow through whatever strategy he picks. But he is also adopting “a policy of many unanswered questions and in which Saudi Arabia controls its own production but not anything else”.

It is not known, for example, whether Saudi Arabia has a minimum price in mind, beyond which it will be willing to curtail production. Then there is the extent to which the kingdom will be able to maintain the consensus against production cuts even among its closest Arab partners in Opec, some of which are not as fit to withstand the financial pain.

Perhaps the trickiest question lies within the kingdom. The just-issued Saudi budget for 2015 projects a slight increase in overall spending despite a significant reduction in revenues, to ease doubters’ concerns that falling oil receipts will cause an economic slowdown.

Mr Naimi is the most powerful among non-royal technocrats and has the confidence of an ailing monarch. Despite grumbling in the business community, it is reasonable to assume that such a critical decision was taken with fairly broad support among senior princes.

The battle with US shale, however, could be long-drawn-out, testing what might be a fragile domestic consensus. How long before it begins to fray as the kingdom dips deeper into its foreign exchange reserves? 

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