Saudi Arabia single-handedly scuttled the Doha meeting, knowing all along that Iran would not participate, with a valid reason. The Russians and others agreed to proceed without Iran, planning to include them at a later date. So if everything was known beforehand, why did the Saudi’s pour cold water on the aspirations of the remaining members, risking its alienation from Russia and the OPEC community?
Was it simply Saudi enmity toward Iran? Not exactly. Upon closer scrutiny, we can find the Saudi masterstroke behind Doha.
It is well known that Saudi Arabia is heavily dependent on oil revenues, and that those revenues are on the brink of collapse. They have sought financial aid from various international agencies to support their dwindling economy. But the trick here is to determine exactly how desperate the Saudis are. Certainly not as desperate as other countries.
Angola has recently sought support from the International Monetary Fund (IMF). Venezuela’s struggles started well before crude prices dropped to 12-year lows and is fighting to avoid a disaster. Azerbaijan has also approached the IMF and the World Bank for help.
Nigeria is also seeking the World Bank’s support. Without external support, Iraq will find it difficult to continue its war against the Islamic State (ISIS). Lower oil prices continue to make matters worse, and Iraqi Kurdistan has taken advantage of the situation and works towards independence and beefing up its unilateral export plans. Ecuador is the worst hit, and now the devastating earthquake has crippled the nation. It will need help from the IMF, the World Bank and a few other lenders to reconstruct. Related: $91 Billion In Capex Cuts, A Serious Hangover For Oil
After a 3.5 percent contraction in 2015, Russia’s gross domestic product will take a further 1.5 percent hit in 2016, as projected by the Central Bank. Kazakhstan is faring no better. Its growth shrunk to 1.2 percent in 2015 from an impressive 6 percent in 2013 and is expected to slow down further to 0.1 percent in 2016.
Most of the participating nations are financially ruined. They have to undertake drastic measures to reduce their dependence on oil. Disaster is imminent.
The Saudis are definitely not immune, even if on the surface disaster isn’t obvious. Saudi Arabia is burning through its reserves at a record pace, but at the same time, it can sustain low prices for the next three to four years. Not only that, it can increase its production by another 2 million barrels per day, according to the International Energy Agency (IEA), if more funds are required.
But why the drastic action on the eve of the meeting disregarding the plight of the participating member nations?
Though the real reason for the about face is known only in the secretive halls of the royal palace, consider this:
Saudi Arabia has held the mantle as the world leader in oil for decades, and has largely enjoyed veto power on all things concerning oil. However, since 2014, it has waged a losing battle against the U.S. shale oil drillers, who are phenomenally more resilient than anyone expected. Related: Low Oil Price Thwarts Wider LNG Adoption in Shipping—For Now
The first signs of the shale producer vulnerability are now, however, becoming visible, with oil production in the U.S. dropping below 9 million barrels a day—the lowest in 18 months. If oil prices continue to remain below $40 per barrel, a few more shale oil producers will fall by the wayside.
But if crude prices rise above $50 per barrel, the shale producers have made their intentions clear, that they will be back in business.
If Saudi Arabia had accepted the deal, oil prices would have jumped to $50/b, giving the shale oil industry a new lease on life. Shale producers would have started pumping at a frantic pace, increasing the glut and pushing oil prices back down.
This whole exercise would permanently dent Saudi Arabia’s reputation as the leading oil player. The baton would have passed to the shale oil drillers—an event that the Saudis simply cannot allow.
With Iran’s return post-sanctions, Saudi Arabia’s leadership in OPEC is under threat. By scuttling the meeting, Saudi Arabia has asserted its supremacy and reminded the OPEC nations just how much power the Saudis still wield. Related: Oil Price Rally Unwinds As Strike In Kuwait Ends
The Saudis have ascertained their importance in the new cartel as well. They have not let Russia assume sole leadership, they have ensured that they remain at the centre of any decision making in the new cartel.
By voicing their objection to the meeting, Saudi Arabia has attempted to win back the leadership baton from American shale producers. It has shown the OPEC members that it still is the leader, thereby blocking Iran from challenging it, and finally, it has maintained its importance in the new bigger cartel, demanding an equal say in the scheme of things alongside Russia.
The Doha washout was the Saudi masterstroke to regain its importance. However, with many OPEC nations on the edge of collapse, the next OPEC meeting will confirm if the Saudi move was indeed a masterstroke, or if it was just a short-lived power grab.
By Rakesh Upadhyay for Oilprice.com
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If I am correct about divestment strategy, there was nothing to be gained by an oil freeze. What the oil needs is a radically lower cost of production, and the Saudis have this to offer the producers of the world. Almost no exploration cost and extremely low production cost. Only when the cheap oil is liquidated will it make economic sense to pursue more costly production, but by that time renewables and EVs can largely replace the oil industry. The value of the Saudi reserves comes down to what can be produced in the next 20 to 30 years. Hence, now is the time to start liquidating these massive reserves.
Why does SA get all the hate when they have maintained they oil production at 9m/day. USA and Canada were the culprit of oil crash not OPEC or Saudi Arabia.
It's not Saudi's fault that Shale companies have poor balance sheets, its those companies management's lack of vision and greed. Shale boom was fueled with cheap loans, thank Yellen for that.
In fact, US Shale should thank SA and Russia for their talks that propelled prices from mid-20's in Feb to mid 40's in April enabling US companies to lock in hedges.
He's 100% biased
The danger is that they might create a physical oil shortage. That could take down the entire debt laden financial system, by forcing the real economy to shrink from lack of oil products to perform the work needed to expand the economy. Without banks operating, all the oil in the world won't put food in your mouth. Nothing happens without them.