OPEC's Oil Production Game: What to Watch Out For
Let’s get something straight—Saudi Arabia does not always control the global oil market.
In fact, it does not always control OPEC. When demand dropped off a cliff in late 2008 and 2009, Saudi struggled to keep the unruly band of producers from cheating constantly on their commitment to tighten the taps and ease the flow.
Added to the fact that the likes of Russia (a non-OPEC country) completely ignored the call to temper the flow and Saudi Arabia looked like a busted flush in its traditional role of oil kingpin.
But this isn’t 2008, and no one around the world is clamoring for supply constraint. And in this market, Saudi Arabia is back as head honcho, numero uno, la grande fromage.
We may have tepid economic growth in the West, but we are not the issue anymore. Some estimate that in much of the West we have already seen peak oil demand and that the key to global prices lies in China and the rest of the emerging world.
With the stupendous economic growth in Asia showing little sign of abating, who is going to supply us with the extra fuel we need? Who is the swing producer? Who has the largest global reserves? Yep, you guessed it. Saudi Arabia is holding a full house.
The problem is, Saudi Arabia does not like to portray itself as the price maker. In fact, in 20-odd OPEC meetings I have attended, I have yet to see the Saudi Oil Minister Ali Al-Naimi sit at the top table in the Secretariat.
Not only that, but he is as cryptic as a sphinx—even when you do get him to talk. So much so that I ended up asking him about the weather instead of the global oil market on one occasion. Such was my frustration at his lack of clarity.
So when Saudi Arabia does speak, we all sit up and listen, but do we actually hear the real message?
For one, when Saudi Arabia talks of the need to respond to global anxieties caused by $100 plus oil, what is it saying? When it says we need to up production, does it mean real output or OPEC quota output?
I only ask because at this moment in time, the OPEC 11 (those subject to official quota level, excluding Iraq), are producing around 26.3 million barrels per day (bpd) as opposed to the 24.85 million bpd they are supposed.
So if OPEC trumpets a 1.5 million bpd rise in output this time round, is this just an admission of what’s going on anyway or is this new oil to the table? If it’s the latter, then that is meaningful. If it’s the former don’t get too excited.
Secondly, Saudi Arabia looks pretty dovish compared to the likes of Venezuela and Iran. And yet I think there is something more brutal about the Saudi assumption that $70 to $80 is a fairer price for both producers and consumers. Think about it—at that price the cartel can still make bundles from their wells, albeit in the diminished currency of the U.S. dollar.
But at $70-80 a barrel you get a collective crisis of confidence in alternatives investment, in biofuels and most topically in nuclear. Potential green investors need a higher oil price to feel safe in their investment. Saudi knows just the price where it can make the most money and quash the opposition. I find that chillingly smart.
Thirdly, and most importantly, as I alluded to above, OPEC in a tight market is pretty much producing at full tilt. Yes, there is a little spare capacity in the UAE and Kuwait, but that in total amounts to little more than 600,000 barrels a day extra. It’s Saudi Arabia that has all the spare.
Various estimates put it between 3.25 million bpd and 4 million bpd. This gives them real power again and means the Vienna announcement will possibly be a neat piece of PR for the Kingdom and little more.
The truth is Saudi Arabia has already been putting more oil onto the market in the last couple of months and is once again producing around 9 million bpd. It is doing this regardless of what the other OPEC members may think.
Oh, and one more thing. The U.S. EIA reckons non-OPEC supply growth will have pretty much run its course this year. All of which means the roughly 40 percent current market share that OPEC and Saudi now controls is set to grow and grow.
With more than 250 billion barrels of the black stuff sitting in the ground, Saudi Arabia has plenty of room to tighten that grip for a few years to come.