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Crude Economics
The Saudis Have a Plan to Weather Oil Cuts

Without Saudi Arabia, OPEC wouldn’t exist. Even with the Saudis, the cartel has been struggling for relevancy in recent years, though a production cut of 1.2 million barrels per day, coordinated with petrostates outside of the cartel as well, has been successful in pushing prices up by roughly $10 per barrel since November. Riyadh has done most of the heavy lifting for this cut, reducing its supply by 500,000 barrels per day (bpd). That’s quite a haircut, even for a country producing upwards of 10.1 million bpd, but it’s not hurting the Saudi economy as much as one might expect because, as the WSJ reports, the petrostate is working to curb its domestic consumption of oil:

[Saudi Arabia] has long flared off huge quantities of gas and left untouched reserves that could more easily be used to generate electricity. The Saudi Energy Efficiency Center says fuel consumed for power has grown by 135 million barrels of oil equivalent annually over the past eight years.

The latter is changing as part of the country’s “Vision 2030” initiative. One big gas and power project that came online in 2016 helped reduce demand for oil to generate electricity last summer by the equivalent to Ireland’s daily crude demand. Solar projects are also taking off in the sunny country with the goal of meeting 20% of power needs in 15 years. Local demand for motor fuel may moderate following a 50% gasoline price increase, freeing up more Saudi crude and crude products for export.

Add it all up and in the first 11 months of 2016 Saudi Arabia’s actual domestic consumption of unrefined crude oil and its increase in production left a combined 3.5 million additional barrels available for refining or export compared with 2015, according to data from the Joint Organisations Data Initiative.

When you’re swimming in crude, there’s not much need to be judicious with how you use it, and profligate oil consumption is something of a cultural touchstone in Saudi Arabia. It’s almost a point of national pride. But with the battle for market share become increasingly pitched as U.S. shale companies squeeze the perennial heavyweight producers, it’s becoming necessary to trim the excess at home to allow the Saudis the ability to influence the global price of oil.

Saudi Arabia is installing more renewables to help ease its reliance on oil-fired power plants, and new natural gas plants will further reduce domestic consumption of oil for the purpose of generating electricity. To the extent that the Saudis can reduce their domestic consumption, they’ll be able to limit the effect of this latest round of cuts on their exports.

Meanwhile, hungry American producers are already taking advantage of the petrostate market intervention.

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  • Tom

    The Saudis in possession one of the few areas of the world where shifting to solar energy as the primary power source actually makes sense, and it’s not a good sign that they haven’t done it already.

  • Jacksonian_Libertarian

    Remember when the corner gas stations used to have price wars? Competition is awesome, everything gets better.

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