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Saudi Influence On Oil Markets Slipping

Saudi Influence On Oil Markets Slipping

If you ever need to be reminded just how influential Saudi Arabia is in the global oil industry, just look back to last week.

On March 22, Saudi Oil Minister Ali al-Naimi said his country was at that point producing about 10 million barrels of crude per day, the most since July, the onset of the glut responsible for the current drop in prices. That news sent down oil prices even further in trading the next day.

Then on March 26, oil prices spiked, as Saudi Arabia and its Gulf Arab allies began a military operation in Yemen, which sits on the Bab el-Mandeb Strait, a key shipping passage between Europe and the Arab Gulf.

And of course Saudi Arabia, at its most influential, persuaded all 12 OPEC members, including some reluctant ones, to maintain what is now a 3-year-old production level of 30 million barrels a day in a price war against US shale producers and others believed to be responsible for the glut. Related: Three Triggers That Will Send Oil Crashing Again

That may be about to change, however, according to a new study from Rice University’s Baker Institute For Public Policy. The document, “A Refined Approach: Saudi Arabia Moves Beyond Crude”, published online March 20 in the magazine Energy Policy, says Saudi Arabia is diversifying from being exclusively a generator of crude oil and will now aim to provide refined oil products as well.

“This is the type of change we expect to see as a state moves to a more advanced stage of development,” Jim Krane, the Wallace S. Wilson Fellow for Energy Studies at the Baker Institute, told Rice’s Office of Public Affairs. Related: Oil Prices Withstand Increased Saudi Production For Now

“There are plenty of upsides from investing in refining, including reducing the kingdom’s reliance on fuel imports and capturing margins now lost to the competition,” Krane said. “Refining also allows the Saudis to export their heavy crude oil to a wider array of customers, beyond the select few importers who have invested in configurations that can handle heavy crudes.”

At the same time, though, this might weaken Saudi Arabia’s long-held role as the global “swing supplier” of crude oil, Krane’s report concluded. With more oil production diverted into refining, it said, the kingdom will have reduced flexibility to use increases or drops in its own oil production to influence prices and prevent price volatility. Related: Beyond Iran And Pakistan: 7 Nuclear Wannabes

The impetus for this shift is a 1.2 million-barrels-a-day expansion in Saudi refining capacity by Saudi Aramco, owned by the kingdom, and two partner companies, the report said. That, plus the rise in other domestic demand, rose to 3.1 million barrels per day, about 27 percent of the country’s total oil production. If that growth rate continues, Saudi domestic oil consumption would double by 2025.

As a result, Krane’s report said, Riyadh may become “less willing or able” to fine-tune its exports to keep the world oil market stable. “In the process, Saudi Arabia may have to update the old ‘oil for security’ relationship that links it with Washington,” Krane wrote. “It may instead turn to a more diverse set of economic and investment ties with individual companies and countries, including China.”

But Saudi Arabians didn’t get rich – and stay rich – just because it has a lot of oil. Krane’s article says the kingdom seems to be carefully adjusting this transition in a way that doesn’t anger the United States and thus “maintain economic integration with powerful countries like the United States,” the report said. “[The Saudis] appear to be succeeding by controlling the crude supply to refineries owned by Saudi Aramco, providing discounts when competition demands it.”

By Andy Tully of Oilprice.com

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