Why Saudi Arabia alone cannot ease the world’s oil troubles

Riyadh has confirmed there will be no unilateral policy changes before the next Opec+ meeting on August 3

A Saudi Aramco employee in a company-branded helmet. Saudi Aramco announced in March 2020 that it had been directed to increase oil capacity to 13 million bpd by 2027. Reuters
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“To view engagement with Saudi Arabia and energy security as asking for oil is simply wrong,” said White House press secretary Karine Jean-Pierre on 13 June.

“I’m doing all I can to increase the supply. The Saudis share that urgency,” US President Joe Biden told reporters on Friday.

The contradiction in these statements exposes the US administration’s dilemma: what does it really want from Saudi Arabia in oil, and what is it prepared to offer in return? At least as importantly, what is Riyadh able and willing to deliver, and what risks does it run?

A past episode illustrates this conundrum. In April 2005, the then Saudi crown prince Abdullah bin Abdulaziz visited the US oil centre of Texas to meet George W Bush, who was president at the time. As now, the two countries were at loggerheads. Crown prince Abdullah was angered by the US invasion of Iraq and Mr Bush’s lack of attention to the Arab Peace Plan that had been proposed in 2002.

In further echoes of today, the oil price had reached then uncomfortably high levels around $50 a barrel, and Saudi Arabia said it was not capable alone of reducing it to a previous target of $22-28 a barrel. The kingdom had said at the time that constraints on US refineries meant that solely increasing crude production would not help.

Saudi Arabia did present a plan to increase its capacity to 12.5 million barrels per day by 2010 and to 15m bpd during the teens from about 10m bpd. It would do this by spending $50 billion — a lot of money in those days.

It did indeed fulfil the first part of this commitment with development of the giant Khurais, Manifa and other fields. But after prices soared to the nominal record of $147 a barrel in July 2008, they slumped in the global financial crisis and Saudi Arabia had to cut production along with its Opec allies. The expansion was not used in full until around 2016 and in April 2020, and even then, only briefly.

Now, as with the meeting between the US and Saudi Arabia in 2005, Mr Biden leaves Jeddah without any public commitments on oil output. Riyadh has confirmed there will be no unilateral policy changes before the next Opec+ meeting on August 3. And the course of the organisation’s production is already set up to September, barring any sudden change of heart.

Crude oil, petrol and diesel prices have all come down since early June and Mr Biden’s threatening words to oil companies, though not as much as he may wish.

The culprit is not the president’s tough talk, but fears of rising interest rates, signs of fuel demand destruction in the US, worries over the Chinese economy, and the global economy sliding into a recession. Global crude inventories have flattened out, suggesting a market for now in rough balance.

Saudi Aramco announced in March 2020 it had been directed to increase oil capacity further to 13m bpd by 2027 from 12m bpd today (the Neutral Zone shared with Kuwait adds notionally another 0.5m bpd). But the first small increments will only be ready by 2025. The full gain will be complete by 2027, “after which the kingdom will not have any additional capacity to increase production”, Crown Prince Mohammed bin Salman told the US-Arab summit on Saturday.

So Saudi Arabia faces three obstacles to any major increase in production after September. First, it would have to agree that with its Opec+ partners.

On Friday, Dr Anwar Gargash, UAE Diplomatic Adviser to the President and former minister of state for foreign affairs, said the country wants a more stable oil market.

The UAE is the only other Opec+ country with substantial usable spare capacity, though. Iraq is in political deadlock; Libya’s oil exports curbed by militias; Russia, Venezuela and Iran under sanctions; and the others struggling with underinvestment and mature fields.

Still, Saudi Arabia wants to keep these allies on-board in case of a renewed slump in demand, which would require reactivating production curbs. It can engage in a careful diplomatic process of adjusting quotas to reflect new realities. But it would not wish to act alone or with the support of a single like-minded partner, unless the other Opec+ states are intransigent.

Second, the country needs to beware of its own production ceiling. On current figures, it could add as much as 1.5m bpd, but at the cost of eliminating any safety margin in the world market. Saudi Minister of State for Foreign Affairs Adel Al Jubeir has indicated the kingdom would only produce more oil if there were a supply shortage.

Opec itself effectively predicts such a shortage: it has global demand rising at a scorching pace: 4.4m bpd in the remainder of this year, another 2.7m bpd next year. This looks implausible but, if it did happen, it is not clear how this level of production could be delivered or even refined. So, Riyadh does not unilaterally have the ability to ease the world’s oil troubles.

Third, as it approaches maximum output levels, it has the experience of 2005-8 as a caution. It does not want to expand or accelerate oil capacity hastily, beyond current plans. Such investments might be stranded by an imminent recession, and then made obsolete in the longer term as climate policy and the rise of electric vehicles reduce world demand into the 2030s.

On upside or downside, Saudi Arabia’s tools for influencing the petroleum market are at risk. But for now, protecting the downside is more achievable. It is not clear what in oil the presidential visit hoped to achieve; we may know in September if it yielded anything.

Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Updated: July 18, 2022, 4:00 AM
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