Update on major changes in Saudi Arabia

6 pumpjacks in Sept. '15 about ready to get working. Photo by James Ulvog.
6 pumpjacks in Sept. ’15 about ready to get working. Photo by James Ulvog.

Lots of transitions going on in the oil industry, particularly Saudi Arabia. I have a bunch of articles to discuss on energy. Will try to get caught up.

5/15 – Daniel Yergin at Wall Street Journal – Where Oil Prices Go From Here / With political change in Saudi Arabia and the market rebalancing, look for $50 a barrel by the fall – I have learned that one should read anything written by Mr. Yergin. No, I haven’t taken on the task of reading his 900+ page books. That’s on my to-do list.

After having fallen from a high of $100 a barrel in 2014 to $26 in February 2016, prices have recovered to the mid or upper $40s.

Mr. Yergin predicts production and demand will balance this year and prices will rise to around $50.

Impact of the dramatic price drop can be seen in two particular areas. Many of the large, multi-year development projects have been stopped. Shale oil producers pushed hard for efficiencies and have milked all they can from economizing.

Mr. Yergin expects world demand for oil will go up 5.7M bopd from current level of 95.6M bopd by 2020. That will force prices up, which will in turn stimulate production.

Article provides context for the Saudi plans to increase their production capacity, letting prices float, and their goal to diversify their economy.  They really need to get their 11% unemployment rate down and especially need to move the 30% unemployment rate amongst the young people.

They want to have sources of revenue other than oil which will require an invigorated and diversified economy. That will require a lot of funding to get going, thus the need for increased oil production. They think there are places with untapped oil. Article says the government continues to recognize they cannot control oil prices, so will have to be competitive on price.

Interesting tidbit. Saudi Arabia has the world’s third largest defense budget. They are behind the US and China yet spend more than Russia.

Two factors pushing for high defense spending and efforts to diversify the economy:  a re-surging Iran and a rapidly deteriorating relationship with the U.S. Thus they urgently need the strength and resilience to stand on their own economically and militarily in a nasty part of the world.

4/29 – Real Clear World – The Collapse of the Old Oil Order – Deep discussion on the collapsed negotiations in Doha, Qatar on 4/17 between OPEC and Russia to freeze production.

Draft of the agreement was ready. At the last moment, Deputy Crown Prince Mohammed bin Salman told the Saudi delegation to reject the agreement unless Iran agreed to not increase production. Iran refused. The Saudis withdrew.

Article says this ends the power of the old order, meaning the ability of OPEC (which is Saudi Arabia) to heavily influence or even control oil prices.

Article suggests Saudi Arabia has two goals. First, crush production of shale oil in the US.  Second, hold down Iran in order to prevent them from gaining more regional power.

There is a rarely mentioned yet massive issue lurking in the background.  The Saudis realize that they cannot rely on the US to give them any support. That concept illustrates why the ongoing war in Yemen (to counter Iran leaning Muslims), trying to cut Iranian oil revenue, and fighting US shale producers is so important – – no one else will be watching out for the Saudi’s interests.

The fear of oil producers is revealed by the transition from “Peak Oil” to “Peak Oil Demand”. That is the concept that supposedly running out of oil soon, the demand for oil will be less than what can be produced. This means instead of all producers (read Saudi Arabia and other OPEC members) being able to charge ever-increasing prices for whatever they can produce, they will now have to compete for market share by undercutting the competition.

Your thank you note for this transition can be mailed to US shale innovators.

Showing another dimension to the end of the old order is the first steps of Saudi Arabia setting up an IPO to sell a small sliver of ARAMCO. The cash generated will be used to develop new industry and economic capacity in the country. Thus the old order continues to wither.

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