Musings: The Challenges Facing Saudi Arabia Include More Than Oil

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Although the IEA is calling for Saudi Arabia to keep pumping nearly 10 MMbopd, G. Allen Brooks believes the country is struggling with the deteriorating political situation surrounding the country.

This opinion piece presents the opinions of the author.
It does not necessarily reflect the views of Rigzone.

The International Energy Agency (IEA) recently issued a call for Saudi Arabia to sustain its current oil output during the upcoming seasonally weak global oil demand period in order to rebuild global crude oil inventories following the harsh winter in the Northern Hemisphere and the uptick in developing country oil needs. The IEA estimates that Saudi oil production in January was 9.76 million barrels a day (b/d), down about 60,000 b/d from December’s output level. Saudi’s sales for January, which includes volumes from storage, averaged 9.92 million b/d, down 70,000 b/d from December. A challenge for the Kingdom may come after March when it shuts down the Shaybah field, currently producing 750,000 b/d of light oil, to hook in new production facilities enabling the field to boost production to 1 million b/d in April 2015.

The call for Saudi to sustain its nearly 10 million b/d output to ease a potential global price spike reflects the belief that the Kingdom will take direction from its customers about its oil output policy. As we have found in the past, this belief may not prove accurate, although it has generally been correct. Saudi is caught in the middle of a rapidly changing Middle East geopolitical environment. These tensions surfaced with the first Arab Spring, but they often drop off the radar screen due to other geopolitical developments such as the East-West struggle over the Ukraine.

To appreciate how the geopolitical environment that shapes Saudi Arabia’s reaction, and its oil output policy, please see the following two charts. It was only five years ago when the entire geopolitical story of the Middle East was centered on the wars waged by the United States and its allies in Iraq and Afghanistan. The Iraqi conflict had the attention of officials in Saudi Arabia because the battle was perceived as a struggle between the two dominant religious sects – the Sunnis and the Shia. This struggle, which involves the Al Qaeda terrorist organization along with its numerous affiliated terrorist groups, is reshaping the political landscape of the Middle East and North Africa. As the map in Exhibit 15 shows, most of the region is now engulfed with this struggle.

Musings: The Challenges Facing Saudi Arabia Include More Than Oil Musings: The Challenges Facing Saudi Arabia Include More Than Oil

As Saudi Arabia contains the most holy sites of the Islamic religion, the Saudi royal family is its custodian and protector. Recently, a new political struggle erupted when Saudi Arabia listed the Muslim Brotherhood as a terrorist organization and the country withdrawal of its ambassador from Qatar who has been supporting the Brotherhood. The United Arab Emirates, Bahrain and Egypt have followed suit, also withdrawing their ambassadors. The spat with Qatar started a couple of weeks ago at a Gulf Cooperation Council foreign ministers’ meeting held in Riyadh. Saudi Foreign Minister Saud bin Faisal declared that Qatar needed to shut down the television station Al-Jazeera, the Brookings Doha Center and the Rand Qatar Policy Institute if the emirate did not wish to be punished.

The punishment was not specified, although the media has reported that Saudi Arabia has threatened a sea blockade of Qatar, although shutting down its land border would be considerably more effective. Qatar has only 40 miles of sea and land borders, with its only land border being with Saudi Arabia. At present, a substantial amount of fresh food and other goods crosses the border every day to supply the busy city of Doha. The border between the two countries has been disputed for 35 years. Qatar and Saudi Arabia skirmished in 1992, when Saudi troops occupied a border post. A final border agreement was signed in 2001.

At the root of the Qatari dispute is a political clash between the emir of Qatar, Sheikh Tamin bin Hamad, and Saudi Arabia’s King Abdullah bin Abdulaziz over support for Islamist groups perceived to be terrorists by the old, autocratic rulers in the region. The principal focus is on Qatar’s support for the Muslim Brotherhood that was instrumental in helping to depose Egypt President Hosni Mubarak several years ago and replace him with the organization’s president, Muhammad Morsi. The Saudi monarchy has been supportive of the military rulers of Egypt who overthrew the Morsi regime late last year. Saudi Arabia, along with the United Arab Emirates, has sent billions of dollars in order to prop up the military government, with no end in sight to the political and economic chaos in the country.


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G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.


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