Saudi Arabia is determined to stick to its policy of pumping enough oil to protect its global market share, despite the financial pain inflicted on the kingdom’s economy.
Officials have told the Financial Times that the world’s largest exporter will produce enough oil to meet customer demand, indicating that the kingdom is in no mood to change tack ahead of the December 4 meeting in Vienna of the producers’ cartel Opec.
“The only thing to do now is to let the market do its job,” said Khalid al-Falih, chairman of the state-owned Saudi Arabian Oil Company (Saudi Aramco). “There have been no conversations here that say we should cut production now that we’ve seen the pain.”
Saudi Arabia rocked oil markets last November when Opec decided against production cuts, making clear that the kingdom was abandoning its policy of reducing supplies to stabilise the price.
Since then, the oil price has collapsed from a high of $115 a barrel last year to $50 a barrel.
Global oil companies, which have put hundreds of billions of dollars of investment on hold as a result of low prices, will be disappointed by the Kingdom’s stance.
The effect on business sentiment has sparked domestic criticism of the market share policy engineered by Ali al-Naimi, the oil minister, and agreed by both the late King Abdullah and the current King Salman, who was crown prince last year and ascended the throne in January.
Officials in Riyadh say their policy will be vindicated in one to two years when revived demand swallows the global oil glut and prices begin to recover.
They argue that in the past, Opec output cuts raised prices to levels where more expensive production, such as shale and deep-sea oil, could flourish. Moving ahead, Opec — led by Saudi Arabia — plans to pump as much as it can towards meeting global oil demand, leaving higher-cost producers to make up the remainder.
$100 oil was perceived as a guarantee of no risk for investment. Now, the insurance policy that’s been provided free of charge by Saudi Arabia does not exist any more
– Khalid al-Falih, chairman of Saudi Aramco
For higher-cost producers, “$100 oil was perceived as a guarantee of no risk for investment”, said Mr Falih. “Now, the insurance policy that’s been provided free of charge by Saudi Arabia does not exist any more.”
Mr Falih, who is also health minister, forecast the market would come into balance in the new year, and then demand would start to suck up inventories and storage on oil tankers. “Hopefully, however, there will be enough investment to meet the needs beyond 2017.”
Other officials also estimated that it would probably take one to two years for the market to clear up the oil market glut, allowing prices to recover towards $70-$80 a barrel.
The fall in government revenues has pushed Saudi Arabia’s oil-dependent economy into a fiscal crunch. To fund this year’s budget deficit of 20 per cent of gross domestic product, the government is dipping into its massive financial reserves.
Officials are also working on a more sustainable strategy to curtail spending, which has ballooned in recent years.
Delaying infrastructure projects, such as the Riyadh underground, and enforcing a spending squeeze across government departments has brought a slowdown in the private sector.
Senior officials dismiss the domestic criticism of the oil policy, saying other producers would have quickly replaced any Saudi production cuts with new output.
Officials, however, acknowledge that the extent of the oil price slump has been deeper than initially envisaged.
“We knew that it was going to be painful but the extent of the pain went beyond our expectations,” said Mr Falih. “The market has overreacted as it typically does in such down-cycles.”
But oil producers are now cancelling projects outright, rather than just deferring them, raising concerns of a future jump in price if demand outpaces supply.
“Now everyone is running to the exit and projects are being cancelled,” said Mr Falih. “That’s necessary, but what will happen five to 10 years from now? Investment is needed.”