The new king of Saudi Arabia moved quickly on Friday to assure global energy markets that the country would maintain its strategy of pushing other top exporters to maintain a high level of oil production. But a prolonged slump in oil prices, as well as budget pressures at home, will test his resolve.
As the new head of the dominant West Asian oil producer, King Salman immediately emerged as the most powerful figure in the global oil patch. Saudi Arabia is the unchallenged leader of OPEC, the group of 12 oil-rich nations that has resisted cutting production, contributing to the recent sharp drop in crude prices.
The death of King Abdullah, announced on Friday, sparked speculation that Saudi Arabia could shift direction, and prices initially rose 2 per cent. Oil prices eased later, though, as the new king said in a televised address that he would stick with “the correct policies which Saudi Arabia has followed since its establishment.”
For the immediate future, most analysts say the Saudi royal family will resist any sharp changes in policy, especially as it tries to navigate multiple foreign policy challenges, like the chaos in neighbouring Yemen.
“There is no near-term reason to modify the kingdom’s position,” said Sadad al-Husseini, a former executive vice president and board member of Saudi Aramco, the national oil company, in a telephone interview. “The kingdom is unlikely to reverse a policy that it has just announced with the outcome still evolving.”
Salman is trying to project stability at a time of uncertainty. Just two weeks ago as crown prince, he gave a speech on behalf of his brother, in which he endorsed the current oil policies. He blamed weak global economic growth for the plummeting prices. Salman has also signalled that nearly all cabinet members will remain at their posts, including the oil minister, Ali al-Naimi.
A career Saudi oil man, al-Naimi is considered to have a combination of industry knowledge and the political skills to manage the royal family and other constituencies in the kingdom. At the last OPEC meeting in November, al-Naimi, the main architect of Saudi Arabia’s current strategy, resisted calls by Algeria, Venezuela and Iran to cut supplies.
But it remains to be seen for how long al-Naimi will remain at his post. In recent years, al-Naimi, 79, is said to have told friends that he would prefer to retire and spend time on other pursuits, like his role as chairman of a science and technical university named after Abdullah. But he has stayed on at the late king’s request.
The volatility in oil prices could also complicate Saudi Arabia’s plans. If prices remain low for a year or longer, Salman, who at 79 is reportedly in poor health, may find it difficult to persuade other OPEC members to keep steady against the financial strains. The International Monetary Fund estimates that the revenues of Saudi Arabia and its Persian Gulf allies will slip by $300 billion this year.
Even gulf oil officials in recent interviews have said they were surprised by how far and how fast prices have fallen. The expectation appears to have been that a floor would have been found to be $50 to $60 a barrel. The price is currently less than $50.
There have also been rumblings that younger members of the royal family are not happy about falling oil revenue, which will inevitably erode the kingdom’s estimated $750 billion in reserves. Eventual budget cuts could threaten the country’s ample economic safety net, including high-paying public sector jobs and exorbitant energy subsidies.
“Something has got to give,” said Michael C Lynch, president of Strategic Energy and Economic Research, a consulting firm, who has advised OPEC in recent years. “The population understands – up to a point – that they will have to cut back.”
Saudi Arabia is the most influential of the 12 OPEC members because it is by far the largest producer and the only one with the ability to substantially vary output to affect markets. In December, Saudi Arabia produced about 9.5 million barrels per day, its average for the year and about 10 per cent of the world total.
In recent years, it has adjusted its production in what has been a mostly successful effort to keep markets balanced and prices in the $100-a-barrel range. But as prices began falling last summer, the Saudis and their gulf OPEC allies declined to intervene, contributing to the sharp drop. So far, the Saudis and other Persian Gulf countries appear convinced that cutting in an oversupplied market would only benefit other producers.
A long, stable period of relatively high prices has led producers, mostly outside OPEC, to make huge investments in high-cost endeavours like Canadian heavy oil projects and deep-water fields in Brazil, as well as the shale projects that have greatly increased production in the United States.
The Saudi and Gulf position is that it will take time for a shakeout to occur among oil producers, which may eventually leave low-cost West Asian producers in a stronger position.
US blames Saudi policies
Many US oil executives blame current Saudi policies for a disquieting bust occurring across the US oil patch. Companies are decommissioning rigs and laying off thousands of workers.
They say the Saudis have purposely driven the price of oil down by more than 50 per cent since the summer to damp the US boom in oil shale drilling, which has nearly doubled domestic oil production in the last six years and virtually eliminated imports from several OPEC producers.
“With the new king coming in, there is a possibility for change,” said Steve J McCoy, director of business development for Latshaw Drilling Co. of Tulsa, Oklahoma. “If they announce that they are going to reduce their output, within two months we could see an increase in price by at least $30 and get us back to above $75 a barrel.” At current prices, he said, there are few wells worth drilling.
Gulf oil officials say privately that Saudi Arabia and other OPEC producers have not completely ruled out a cut that might help calm the markets. But the Persian Gulf producers insist that a wide range of countries, including Venezuela and non-OPEC producers like Russia, should participate – a long shot at this point.
“Saudi oil policy is set largely on a technocratic basis,” said Anthony Cordesman, a geopolitical expert who follows Persian Gulf affairs at the Center for Strategic and International Studies in Washington. “There is no major international reason for Saudi Arabia to change its current approach.”
Simon Henderson, a West Asian analyst at the Washington Institute for Near East Policy, said it was most likely that the reins of power, including over oil policy, would be held by a group of advisers now forming around the king.
“Now that he is older, he is likely to take a more hands-off approach, relying on a coterie of advisers, which will probably include several of his sons,” said Henderson, who has written extensively on Saudi succession issues.
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