Saudi Arabia’s oil strategy and its impact on global energy markets Professor Paul Stevens Distinguished Fellow, Chatham House Professor Emeritus, University of Dundee Visiting Professor, University College London (Australia) IEEJ Seminar Tokyo 12 th June 2015 IEEJ : June 2015. All Rights Reserved.
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Saudi Arabia’s oil strategy and its impact on global energy markets Professor Paul Stevens Distinguished Fellow, Chatham House Professor Emeritus, University of Dundee Visiting Professor, University College London (Australia)
IEEJ Seminar Tokyo 12th June 2015
IEEJ : June 2015. All Rights Reserved.
Chatham House | The Royal Institute of International Affairs 2
Presentation Outline
• A brief history of Saudi Arabia’s oil policy
• Some recent changes to Saudi policyfollowing the “Arab Uprisings”
• Reasons for current uncertainties overSaudi policy
IEEJ : June 2015. All Rights Reserved.
Chatham House | The Royal Institute of International Affairs
3
A brief history of Saudi Arabia’s oil policy
• Price moderation• Tehran December 1973• The DOHA split 1976
• The swing role 1974-1980
• Resumption of the swingrole 1981-85
• The summer of 1985
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Oil production 1965-2013
Rest of OPEC
Saudi
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1979 1980 1981 1982 1983 1984 1985
Saudi Arabia's swing role 1979-1985
Non-OPEC
Rest of OPEC
Saudi Arabia
IEEJ : June 2015. All Rights Reserved.
Chatham House | The Royal Institute of International Affairs 4
Some recent changes following the “Arab Uprisings”
• The price norm since 2000 has been volatility• However between Jan 2011 and June 2014…
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Monthly spot prices WTI 2011- June 2014
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$ p
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Monthly spot prices WTI 2000-Mid May 2015
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Chatham House | The Royal Institute of International Affairs 5
The recent market developments The input of geo-politics
• Price stability is rathersurprising given the “ArabUprisings”
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Geo-political Losses
Changes in production Dec-2010 to Mar-2014
Egypt
Yemen
Sudan
Syria
Iran
Libya
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$ p
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Monthly spot prices WTI 2011- June 2014
IEEJ : June 2015. All Rights Reserved.
• Why the price stability? Gains offset losses
• BUT key role for Saudi Arabia “balancing” the market
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Losses Gains
Changes in production Dec-2010 to Mar-2014
USA
Egypt
Yemen
Sudan
Syria
Iran
Libya
The recent market developments
Chatham House | The Royal Institute of International Affairs
IEEJ : June 2015. All Rights Reserved.
• Why the price stability? Gains offset losses
• Key role for Saudi Arabia “balancing” the market
0
500
1000
1500
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2500
3000
3500
tho
usa
nd
b/d
Losses Gains
Changes in production Dec-2010 to Mar-2014
USA
Egypt
Yemen
Sudan
Syria
Iran
Libya
The recent market developments
Chatham House | The Royal Institute of International Affairs
IEEJ : June 2015. All Rights Reserved.
The underlying problem was “OPEC’s dilemma”
– Governments need ahigh price to survive
– But this leads to demanddestruction
– And increased Non-OPEC supply
– This was unsustainable*
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Source: Ali Aissaoui Apicorp Economic Commentary Vol 9 N0. 708 July- August 2014
OPEC Median Budgetary Break-Even Price
* As predicted: See Paul Stevens & Matthew Hulbert, Oil prices: energy investment, political stability in theexporting countries and OPEC’s dilemma. Chatham House Briefing Paper, October 2012
Chatham House | The Royal Institute of International Affairs
IEEJ : June 2015. All Rights Reserved.
Demand destruction
• Note high prices since2005
• Demand disappointing in2014. Partly because of anincome effect.
• BUT there is also a priceeffect leading to demanddestruction. China andIndia removing subsidieson domestic prices
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Annual average prices (Brent 2013 US$) 1980-2013
1980-86
1987-2004
2005-2010
2011-2013
Chatham House | The Royal Institute of International Affairs
IEEJ : June 2015. All Rights Reserved.
Increased Non-OPEC supply
• Courtesy of the “shaletechnology revolution” =horizontal drilling +hydraulic fracturing
• US output rose from 5.5mnb/d in 2010 to 9.4mnb/d in 2015
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2010 2015 2020 2025 2030 2035 2040
US CRUDE OIL PRODUCTION 2010-2040
Tight Oil
Conventional Oil
Source: EIA Energy Outlook May 2014 Note the data points are five yearly intervals
Chatham House | The Royal Institute of International Affairs
IEEJ : June 2015. All Rights Reserved.
What happened next? Dramatic rise in inventories
• If continuing oversupply cannotbe stored, must be sold at lowerprices
• Saudi begins to cut productionduring summer 2014 BUT thenremembers their previous “swingrole”
• In early September 2014 theystop cutting and conspiracytheories rule!
• OPEC 27th November meetinglaunches prices into a competitivemarket for first time since 1928
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US crude oil stocks 2011- April 2015
EIA Website 18 April 2015
Chatham House | The Royal Institute of International Affairs
IEEJ : June 2015. All Rights Reserved.
Growing over-supply = from June 2014 price collapses
• Some recovery afterJanuary 2015
• But not clear on what basis,given inventories continueto rise
– Geo-politics back again:Saudi Arabia in Yemen?
– Many talking up the market? 0
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$ p
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Monthly spot prices WTI 2011-Mid May 2015
Chatham House | The Royal Institute of International Affairs
IEEJ : June 2015. All Rights Reserved.
Chatham House | The Royal Institute of International Affairs 13
Presentation Outline
• A brief history of Saudi Arabia’s oil policy
• Some recent changes to Saudi policyfollowing the “Arab Uprisings”
• Reasons for current uncertainties overSaudi policy
IEEJ : June 2015. All Rights Reserved.
Chatham House | The Royal Institute of International Affairs 14
Reasons for current uncertainties (1)
• New King and the next generation
• Market share strategy is new
• Claiming the success of the strategy BUT itis too early to tell given:
• Demand uncertainty
• The current “fracklog”
• Changes to the price elasticity of supply
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Chatham House | The Royal Institute of International Affairs 15
Reasons for current uncertainties (2)
Changes to the oil sector institutions and other future changes?
• Next Oil Minister?• Pre-Salman there were two candidates• But Khaled Al Falih moved to Health Ministry and Abdul
Aziz Bin Salman as a “Royal”???
• Moving Saudi Aramco away from the Oil Ministry?• Council of Economic Development Affairs• Supreme Council of Saudi |Aramco replaces the Supreme
Petroleum Council
• Possible scenario = splitting Oil from Energy? But inreality probably little change to the underlying policy!
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Thank you
Chatham House | The Royal Institute of International Affairs
IEEJ : June 2015. All Rights Reserved.
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