IEEJ : June 2015. All Rights Reserved.

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

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Presentation Outline• A brief history of Saudi Arabia’s oil policy• Some recent changes to Saudi policy
following the “Arab Uprisings”• Reasons for current uncertainties overSaudi policy

Chatham House | The Royal Institute of International Affairs2

IEEJ : June 2015. All Rights Reserved.

A brief history of Saudi Arabia’s oil policy• Price moderation• Tehran December 1973
• The DOHA split 1976

40000
35000
'o 30000
o 25000
o20000Rest of OPEC

15000
b/ 10000
d 5000Saudi

196519691973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013

• The swing role 19741980

Oil production 1965-2013• Resumption of the swingrole 1981-85• The summer of 1985

Saudi Arabia's swing role 1979-1985
100%
90%
80%
70%60%
50%
40%
30%
20%10%0%1979 1980 1981 1982 1983 1984 1985

Chatham House | The Royal Instituteof International Affairs

Non-OPEC

Rest of OPECSaudi Arabia

3

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Some recent changes following the “Arab Uprisings”• The price norm since 2000 has been volatility• However between Jan 2011 and June 2014…
Monthly spot prices WTI 2000-Mid May 2015
160

Monthly spot prices WTI 2011- June 2014

120

120

100

100

8080

60
40

20

$ per barrel$ per barrel

14060

402000Chatham House | The Royal Institute of International Affairs

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The recent market developments
The input of geo-politics

Monthly spot prices WTI 2011- June 2014

• Price stability is rather
surprising given the “ArabUprisings”
Changes in production Dec-2010 to Mar-2014

120

3500

100
80
2500

60
40
200

thousand b/d$ per barrel

3000

2000
Egypt
1500

Yemen
Sudan

1000

Syria
Iran

500

Libya
0

Geo-politicalLosses
Chatham House | The Royal Institute of International Affairs

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The recent market developments• Why the price stability? Gains offset losses• BUT key role for Saudi Arabia “balancing” the market
Changes in production Dec-2010 to Mar-2014
3500

3000

thousand b/d2500
2000

USA
Egypt

1500

Yemen

Sudan

1000

Syria
500

IranLibya

0Losses

Gains

Chatham House | The Royal Institute of International Affairs

IEEJ : June 2015. All Rights Reserved.

The recent market developments• Why the price stability? Gains offset losses• Key role for Saudi Arabia “balancing” the market
Changes in production Dec-2010 to Mar-2014
3500
3000

thousand b/d

2500
2000

USA
Egypt

1500

Yemen
Sudan

1000

Syria
500

Iran
Libya

0Losses

Gains

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

OPEC Median Budgetary BreakEven Price160– And increased NonOPEC supply

120
US$ per barrel– But this leads to demanddestruction

140100806040200– This was unsustainable*Source: Ali Aissaoui Apicorp Economic Commentary Vol 9 N0. 708 July- August 2014

* 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

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Demand destruction• Note high prices since2005Annual average prices (Brent 2013
US$) 1980-2013
140• Demand disappointing in2014. Partly because of an
income effect.
• BUT there is also a priceeffect leading to demand
destruction. China andIndia removing subsidies
on domestic prices120
20 1001380

1980-86

US$p/b

1987-2004
2005-201060

2011-2013
40

20

1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012

0Chatham House | The Royal Institute of International Affairs

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Increased Non-OPEC supply• Courtesy of the “shaletechnology revolution” =horizontal drilling +hydraulic fracturing

US CRUDE OIL PRODUCTION 2010-2040
10987Tight Oil

6• US output rose from 5.5
mnb/d in 2010 to 9.4
mnb/d in 2015

543Conventional Oil

2102010

2015

2020

2025

2030

2035

Source: EIA Energy Outlook May 2014
Note the data points are five yearly intervals

Chatham House | The Royal Institute of International Affairs

2040

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What happened next?
Dramatic rise in inventories• If continuing oversupply cannot
be stored, must be sold at lowerprices• Saudi begins to cut production
during summer 2014 BUT thenremembers their previous “swingrole”• In early September 2014 theystop cutting and conspiracy
theories rule!

US crude oil stocks 2011- April 2015
1200000
1180000
1160000'0 1140000
00 1120000
b1100000
arr 1080000
el 1060000
s1040000•OPEC 27th November meeting

1020000

launches prices into a competitivemarket for first time since 1928

1000000

Chatham House | The Royal Institute of International Affairs

EIA Website 18 April 2015

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Growing over-supply = from June 2014 price collapses• Some recovery afterJanuary 2015Monthly spot prices WTI 2011-Mid May2015
120100– Geo-politics back again:
Saudi Arabia in Yemen?
– Many talking up the market?

Chatham House | The Royal Institute of International Affairs

80$ per barrel• But not clear on what basis,given inventories continue
to rise

60

40

200

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Presentation Outline• A brief history of Saudi Arabia’s oil policy• Some recent changes to Saudi policy
following the “Arab Uprisings”• Reasons for current uncertainties over
Saudi policy

Chatham House | The Royal Institute of International Affairs

13

IEEJ : June 2015. All Rights Reserved.

Reasons for current uncertainties (1)• New King and the next generation• Market share strategy is new• Claiming the success of the strategy BUT it
is too early to tell given:• Demand uncertainty• The current “fracklog”• Changes to the price elasticity of supply

Chatham House | The Royal Institute of International Affairs

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Reasons for current uncertainties (2)Changes to the oil sector institutions and other futurechanges?
• 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

Contact : report@tky.ieej.or.jp

Chatham House | The Royal Institute of International Affairs