Crossing swords in the Gulf

By Eric Watkins

LOS ANGELES, Mar. 29 – Saudi Arabia’s Oil Minister Ali I. Al-Naimi has been at pains in recent weeks to underline his country’s desire to see lower oil prices, this week in an editorial for the Financial Times.

“High international oil prices are bad news. Bad for Europe, bad for the US, bad for emerging economies and bad for the world’s poorest nations,” Al-Naimi said, and few would take issue with that.

But he also insists that “a period of prolonged high prices is bad for all oil producing nations, including Saudi Arabia, and they are bad news for the energy industry more widely.”

Behind that remark is much of Saudi Arabia’s philosophy when it comes to oil – its most precious commodity. Indeed, with upwards of 260 billion barrels of oil still in the ground, Saudi Arabia has the world’s largest reserves.

MONEY SPINNER

As a result, the Saudis are looking to have their oil be a money spinner for years to come. Assuming they produced 10 million barrels per day, 365 days a year, the Saudis would produce about 3.65 billion barrels a year.

At that hypothetical rate, they have around 80 years of production left – assuming they discover no new reserves and assuming they stay at 10 million barrels a day. Does anything sound more like money in the ground than that? Wouldn’t anyone like to keep it that way?

Keeping it that way is exactly what the Saudis want and that is why they always aim for moderation in pricing. They know, and know only too well, that high prices are an invitation for consumers to seek cheaper sources of supply or, for that matter, cheaper forms of energy.

That’s why Al-Naimi says that, “The bottom line is that Saudi Arabia would like to see a lower price.” And his explanation makes perfect sense, too.

“It would like to see a fair and reasonable price that will not hurt the global economic recovery, especially in emerging and developing countries, that will generate a good return for producing nations, and that will attract greater investment in the oil industry.”

FINANCIAL INCENTIVE

In a word, a moderate price keeps everyone happy, and productive. Most of all, it is in the interest of oil producers such as Saudi Arabia to keep exploring and producing oil: they have a financial incentive to keep their industry going. Doesn’t that make sense, too?

So, what’s with high prices these days? Al-Naimi concedes that, “geopolitical tensions in the region, and concerns over supply, are helping to keep prices high.” That’s short-hand for what we all know: the current troubles with Iran.

“Yet fundamentally the market remains balanced,” he says. “It is the perceived potential shortage of oil keeping prices high – not the reality on the ground. There is no lack of supply. There is no demand which cannot be met. Total commercial stocks for OECD nations are within target, and there is at least 57 days forward cover, enough to handle almost any eventuality.”

Can the Iranians close Hormuz? No. Can the Saudis make up for Iran’s sanctioned oil? Yes.

Here is a man who knows the score, and it is summed up in that wonderful distinction he makes between a perceived shortage and a real one. That is the distinction on which so much of today’s trading turns: not on whether there is an actual disruption of supply but on whether there could be one.

SLIGHT UNCERTAINTY

Al-Naimi acknowledges that there is enough oil on hand and in storage to handle “almost any eventuality.” And it is that slight uncertainty which is driving the market: what if… what if… what if? People are betting, and they do not want to bet the wrong way. Too much is at stake.

But the bet is still on a perception, a possibility.

Against that, Al-Naimi offers a lifetime of experience in his country’s oil industry. He started out as an Aramco office boy, don’t forget, and he has risen in its ranks over the course of a lifetime. If there’s something about the oil business he doesn’t know, then it probably is not worth knowing.

In a word, Al-Naimi is letting us know that those who bet on the possibility of something going wrong – of some hypothetical demand not being met – are betting against the proven realities of the oil trade over decades.

As he says: “We want to correct the myth that there is, or could be, a shortage. It is an irrational fear, a fear without basis.” And so it is.

But there is something else that Al-Naimi is not disclosing: that it is in the interest of Iran to create and play on the possibility of supply shortages precisely in order to drive prices higher and higher. This is a new use of the oil weapon, and the Iranians are adept at it.

CROSSING SWORDS WITH IRAN

In their efforts to keep world oil prices reasonable, the Saudis are crossing swords with Iran or, if you will, oil weapons. And why should they not? A nuclear Iran standing just across the Gulf is the last thing the Saudis want to see – and they are not alone in that.

Saudi Arabia is doing its level best to keep oil prices low as part of the international effort to thwart Iran’s nuclear ambitions. Lower oil prices means less income for Iran and its effort to acquire nuclear weapons.

Saudi Arabia is also pumping more oil than it has in decades. The reason for that is clear, too. More Saudi oil means a diversity of supply, and that means more choice for countries that want to stop buying Iran’s oil in support of the sanctions regime.

Al-Naimi is an oil diplomatist par excellence, too diplomatic perhaps to be so pointedly clear in the purpose of pumping more oil to achieve lower prices. In the long run, it is certainly to preserve his country’s market share. But for the immediate future, it is to support the international effort to thwart Iran’s nuclear ambitions.

The Saudis know how to use the oil weapon, too.

Contact Eric Watkins at hippalus@yahoo.com

© Glamma Productions 2012

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About Eric Watkins

Eric Watkins is a consultant specializing in oil diplomacy. A former journalist, Mr. Watkins's work has appeared in numerous leading publications including The Wall Street Journal, The Economist, The Financial Times, and specialist media such as Oil & Gas Journal, Middle East Economic Survey (MEES), and Lloyd's List.
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