Kemp: The Saudi Oil Enigma

More generally, the close military and strategic links have not translated into an agreement on oil prices and production: it is emphatically not the case that pricing policy is the result of discreet negotiations between Washington and Riyadh. To their chagrin, a succession of U.S. presidents has discovered the limits of their influence over the Saudis when it comes to oil prices and production.

Questions About Capacity

Diplomats and even some economists often assert Saudi Arabia upholds its part of the bargain, in part, by holding spare production capacity with which to meet disruptions in oil supplies from other producers. Only Saudi Arabia has the financial capability and the foresight to invest in spare capacity to help stabilise global oil prices.

The problem is that there is almost no evidence to support this claim. Since the kingdom's exports peaked at almost 10 million barrels per day in 1980, most of the spare capacity has been in the form of reduced output from older fields as new ones have come onstream.

Most spare capacity appears to have been the result of past errors in forecasting oil demand and efforts to increase the amount of oil eventually recovered by lowering production rates from ageing fields like Ghawar to sustain reservoir energy and prevent water inundating the wells while bringing on new fields like Manifa.

Nearly all of the kingdom's reported spare capacity has followed a downturn in prices and demand, notably during the 1980s and 1990s, which suggests that capacity is the result of planning errors rather than deliberate policy.

There is no evidence that Saudi Arabia has deliberately developed large new fields simply to allow them to left idle "just in case" there is a supply interruption elsewhere in the world.

Reluctant Swing Producer

Saudi Arabia is often described as the oil market's "swing producer", a role which senior policymakers are said to dislike after the trauma of seeing exports shrivel from almost 10 million barrels per day in 1980 to less than 3 million in 1985.


123456

View Full Article

WHAT DO YOU THINK?


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Maisam Otoum  |  October 14, 2014
Great article. It is magnificent how Supply/Demand work in such a harmony that no single economy player can manipulate production growth/decline to its interest.
Philippe  |  October 14, 2014
OPEC goal in setting crude oil prices is two folds: First is to fetch as much as possible without causing an economic down turn in the western industrialized world. In other word set production in order to meet demand, making sure the price is high enough for a sustainable demand. Second: The Middle East economics is solely based on O&G production. There is no other commodity or industry that can possibly provide for these populations. Looking at the make-up of these populations, the thing that jumps at you is that the least populated have oil and the most populated do not have oil. The Saudis politic is to keep control on its population, but also to prop up politically “the have not”. To that end the Saudis are playing and important role in controlling the have not by, shall we say, philanthropy. The religion plays an important role; Iran without the nuclear bomb is under control. The Saudis can sustain a crude price in the $70s, this will make “the have not” tributaries of the Saudis which will become a better philanthropist. Iran with a large population will have a harder time to keep its population in check. Religion will play an important role; can the Saudis accept an Iraq totally under the thumb of Iran? The Saudis are the major player and will stay major player. The boots on the ground may be rented boots paid for by the Saudis.


Most Popular Articles