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Crude Economics
Saudis Promise to Keep the Oil Coming

Riyadh already has a New Year’s resolution in mind: maintain high levels of production, seemingly no matter how far global prices plunge. Just today, Saudi oil minister Ali al-Naimi backed the country’s current strategy of pumping oil in a business-as-usual way, saying the approach “is a reliable policy and we won’t change it.” The WSJ has more:

“We will satisfy the demand of our customers. We no longer limit production. If there is demand, we will respond. We have the capacity to respond to demand,” [Ali al-Naimi said]. […]

Wednesday’s remarks are Mr. Naimi’s first public comments since OPEC failed to reach any agreement to restrain production earlier this month, leaving members to continue pumping crude at near-record levels into an already oversupplied market. The group abandoned its production ceiling of 30 million barrels a day, which it had breached routinely.

Going off of these remarks, it really doesn’t look like the Saudis are interested in acting as the world’s swing producer again. While in times past, Riyadh has done the heavy lifting within OPEC to scale back production during periods of prolonged low oil prices, this time around, the Saudis have strong-armed the cartel into a policy of inaction, choosing to fight for market share instead of coordinating to inflate prices.

The downside of this, of course, is that petrostate regimes will find their finances imperiled when they’re suddenly making $75 less per barrel of oil. To that end, Saudi Arabia is working to trim its budget to lessen the impact of the bearish market. Reuters reports:

The 2016 budget and reforms announcements marked the biggest shake-up to economic policy in the kingdom for over a decade and aimed to cut the government deficit to 326 billion riyals, down from 367 billion riyals or 15 percent of gross domestic product in 2015.

Next year’s budget projects spending of 840 billion riyals, down from 975 billion riyals spent in 2015.

The government also said it was hiking prices for fuels, water and electricity as well as gas feedstock used by industry, as part of politically sensitive subsidy reforms.

With these reforms, the Saudis are sending a signal to Iran and Russia: We can take the pain of low oil prices better than you. They are also giving a message to American fracking firms: We have no intention of making life easy for the upstart non-OPEC producers of the world.

And for the rest of OPEC’s members, the question now has to be: What good is this cartel? Its largest, most influential member—the only one really capable of scaling production back enough to affect prices—has lost interest in setting prices. 2016 looks to be yet another year of bargain crude. And while every country and company in the business of selling oil will move through this next year with a permanent scowl on its face, perhaps the biggest loser of them all will be Venezuela, whose deeply dysfunctional economy can’t bear the strain of much more bad news like this latest Saudi announcement.

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  • Andrew Allison

    At last: “While in times past, Riyadh has done the heavy lifting within OPEC to scale back production during periods of prolonged low oil prices, this time around, the Saudis have strong-armed the cartel into a policy of inaction, choosing to fight for market share instead of coordinating to inflate prices.”

  • Jacksonian_Libertarian

    For Venezuela the Saudi’s policy is enemy action by America, just as all their self inflicted wounds are America’s fault.

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