How Long Will Saudi Arabia Stay in the Oil Driver’s Seat?

US oil prices that reached a record high of $41.85 a barrel on the NYMEX, before beginning to slide on May 24, fuelled fears of a slowdown in world economic growth. They led to immediate pressure on OPEC nations to boost production and stop the upward spiral that began in December 2003, when oil prices passed the $30 per barrel barrier.

DEBKA-Net-Weekly‘s energy experts assert that the spike at the gas pumps cannot be explained away by the failure to end terrorist attacks in Iraq or Saudi Arabia – incidents that so far have had little impact on Saudi oil exports or Iraq’s ability to sustain capacity. Neither is the price rise caused, as some opponents of Washington’s energy policy contend, by the addition of 120,000 barrels per day to the US strategic oil reserve.

In November 2001, President George W. Bush announced a decision to expand US strategic petroleum reserves (SPR) from 544 million barrels to 700 million barrels by 2005. Therefore, the gradual topping up of US storage tanks over the past three years should not have created a world oil shortage justifying prices leaping over $40 million per barrel.

It would seem the current high prices are part of a more calculated move linked to world oil market fundamentals.

According to international and oil industry forecasts, world oil demand will accelerate sharply over the next two decades to 78 million-92 million barrels per day. At the same time, forecasters expect oil exports will not pass the 68 million bpd mark. This adds up to a 24 million bpd shortfall over the next 20 years (Such forecasts almost never take into account future oil field development, but they do point to the likelihood of a shortfall in 2025 nonetheless).

The US energy department began warning of this shortfall in the late 1990s, touching off an international effort to develop oil fields in the Caspian Sea, Russia and West Africa. Oil field development in the Middle East remained stagnant – except in Iran, which has been trying for years to expand its ability to sustain capacity while bypassing US restrictions. Saudi Arabia, sitting atop a quarter of the world’s proven oil reserves, says it can reach a sustained capacity of 10.5 million bpd and has rejected calls to step up production, arguing it maintains spare capacity of more than two million bpd.

Iraq’s June forecast – 2.7 bpd

Under Saddam Hussein and an international sanctions regime, Iraq was denied of resources over the past decade for developing new oil fields. Its existing fields and installations were hit hard by the sanctions. The Americans began rebuilding Iraqi oil fields and export capability after the March 2003 invasion, and the process has moved ahead rapidly over the past year. Forecasters now see Iraqi oil production reaching 2.4 million bpd to 2.7 million bpd by the end of June compared with 1.33 million bpd in 2003. At this stage, the United States is focusing only on existing oil fields, which can produce at least four million bpd to five million bpd, and is not developing new ones.

Developing new oil fields in Iraq, Saudi Arabia and Iran would call for a massive injection of capital. But investors have been wary: the potential for instability in the region is high, either as a result of political restrictions such as sanctions on Iran or Saudi Arabia’s refusal to allow foreign companies to develop new oil fields.

In light of Riyadh’s policy, Saudi oil minister Ali Naimi‘s May 24 remarks on oil prices were particularly interesting. He said a $30 to $34 per barrel price for crude in New York reflected the costs of oil field investment and maintenance.

The comments suggested that Riyadh believes the $22 to $28 price range set by OPEC four years ago was no longer realistic. It was not known whether other member states, such as Iran, Nigeria and Venezuela, which want prices pushed above that range, are prepared to make do with the $30 to $34 price proposed by Naimi.

Following Naimi’s remarks and a Saudi promise to raise production in a bid to lower prices, it is likely oil prices in New York will shortly stabilize, probably within a month, to around $30 to $34 a barrel. That would be good news for Bush in a presidential election year.

Naimi’s linkage between the price of oil and the costs of maintaining existing oil fields and developing new ones was particularly interesting. Assuming Saudi rulers sanctioned his remarks, it appears likely the kingdom is finally thinking seriously about developing new fields, either on its own or with the help of international oil companies, as a way to deal with the expected world oil shortfall over the next two decades.

It appears the constant warnings of a shortfall led to a calculated Saudi move – coordinated with the Bush administration – to raise oil prices in order to make the development of new fields economically feasible. The only hitch was that prices soared beyond the planned range of $30 to $34 per barrel in New York. In response, the Saudis plan to increase their oil exports to between 600,000 bpd and 1.5 million-2 million bpd to bring prices down to the level sought by the Bush administration.