In December 2016, OPEC, Russia, and several other non-OPEC producers sealed a historic deal. For the first time in 15 years, there would be oil production cuts. At the time, RBC’s Helima Croft said Saudi’s oil minister Khalid al-Falih had “something of Mario Draghi’s ‘whatever it takes’ moment.” Seven years on, OPEC and Russia are still controlling the market. But now, Saudi Arabia is saying there is nothing it can do about the oil market and prices. It has done all it could, according to its foreign minister, Prince Faisal bin Farhad.
Perhaps seven years ago, industry observers and analysts would have been surprised if someone told them that Saudi Arabia would go from a staunch friend of large oil-importing countries to something of a frenemy.
Yet the Kingdom’s clear unwillingness to reduce oil prices that are making the world’s biggest economies pant is a logical continuation of processes that have been taking place during this period between “Whatever it takes” and ‘We did all we could”.
To begin with, the 2016 cuts and the birth of OPEC+ were aimed at boosting rather than reining in prices. Yet, in all fairness, it’s worth noting that OPEC and its de facto leader have been just as active in keeping a lid on prices whenever their excessive level has affected demand.
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This is not really the case now. Now, demand for oil is strong, and it will likely be a while yet before price levels begin affecting it. The reasons for this can be summed up as follows: sanctions, U.S. shale economics, and Middle East policy mistakes.
EU, UK, and U.S. sanctions on Russian oil, although indirect, have shrunk the availability of oil from one of the world’s top producers. Further shrinkage is on the way if EU officials are to be believed. Many argue that Russia could simply redirect its oil flows from Europe to Asia, but this will not happen overnight and will not contribute to solving Europe’s oil deficiency problem. The market, in other words, remains tight.
U.S. shale drillers, meanwhile, are not grabbing the chance to return to “Drill, baby, drill” because they seem to have learned their lesson, namely, that unbound production growth tends to boomerang. So they are now focusing on returning cash and being careful with production growth, with production cost inflation and material, equipment, and workforce shortages helping them stay focused.
While this is happening, the decision-makers in Washington are desperately looking for a way to mend fences with Saudi Arabia. It’s probably safe to say that nobody in the White House thought that the U.S. may still need Saudi oil when that Biden speech that called the Kingdom “a pariah state” because of the Jamal Khashoggi murder was being written. Now, U.S. consumers are paying the price.
Seven years ago, the relationship between Saudi Arabia and the United States—and by extension with Europe—was pretty cordial. Sure, some rights activists did have a problem with Saudi Arabia’s actions in Yemen, but governments were happy enough to continue doing business with Riyadh.
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Then the Biden administration came into office, and they decided to put it bluntly to their partners in the Middle East: the current host of the White House did not like the war in Yemen and was not going to support it. With the Yemeni Houthis regularly targeting Saudi sites, this could not have sat well with the decision-makers in Riyadh. The Saudi Crown Prince made that abundantly clear in his first interview for a Western media, The Atlantic.
In the context of deteriorating bilateral relations, it could hardly be a surprise that Riyadh repeatedly refused to increase its oil production after first being asked and then being threatened by President Biden to boost-or-else. Apparently, the or-else part was never there to begin with.
Europe has not been the smartest tool in the shed either. After years of championing wind, solar, and hydrogen, arguing that oil is on its way out, and discouraging investments in new oil and gas exploration, it is hardly a surprise that countries like Saudi Arabia are itching to teach it a lesson.
They have nothing to lose, after all. The only thing they can do is win—prices remain high, and so does demand because nobody can add more supply quickly enough to push prices to more reasonable levels from a consumer’s perspective.
It all came down to bad decision-making, then. After years of being told that their main bread-earner industry is dying and there is no need to save, after years of being singled out as one of the culprits behind climate change because of its oil industry, and after being called a pariah state by the leader of a nation that was supposed to be a best friend, Saudi Arabia must have simply had enough.
Incidentally, it is making a lot of money from the current price situation.
By Irina Slav for Oilprice.com
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1- As I have been repeatedly saying, Saudi Arabia has no spare production capacity of its own. The small capacity that exists belongs to OPEC+. This capacity estimated at 2.0 million barrels a day (mbd) will only become available by the end of the year once OPEC+ has recovered all the production cuts it implemented in April 2020 during the height of the pandemic.
2- Global oil demand is strong because it is already in a super-cycle phase of accelerated demand growth and not because of Western sanctions or US shale economics or Middle East policy mistakes. Demand and prices started to surge in January 2021 long before the Ukraine conflict and sanctions came on the scene. The conflict hasn’t disrupted global oil supplies. Even the conflict price premium has fizzled out leaving prices to market forces.
3- Sanctions haven’t shrunk Russian oil exports. If that was true, we would have seen Brent crude heading towards $140-$150 a barrel by now.
4- US shale oil is a spent force. Its inability to raise production despite rising WTI prices and oil rigs has far less to do with capital discipline and far more to do with the fact that the sweet and lucrative spots in the shale plays have already been exhausted forcing drillers to move to poor and costly-to-produce spots thus causing costs of production to rise and production to decline..
5- Mending fences with Saudi Arabia won’t lead to higher Saudi production if the capacity isn’t there.
6- The rhetoric by inept EU about banning Russian oil imports is causing prices to surge. Every time it opens its mouth, it puts its foot in it.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
How many mistakes can this idiot make? After seeing, Hillary and her lawyer being accused of creating the Russia Mueller disaster, Trump's 4 years would be welcomed, as he kept gasoline down, inflation in check and kept the world at peace.
However, we do not need another 80 year old President, as we need term and age limits.