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Saudi Arabia Poised for Reigning Global Oil Market

Saudi Arabia Poised for Reigning Global Oil Market

The latest meeting of the Organization of the Petroleum Exporting Countries (OPEC) was held in Vienna. In the meeting, Saudi Arabia, the group’s decided to maximize its oil production, ending its strategic oil partnership with Russia. This led to the crashing of oil prices to the lowest since the Gulf war in 1991.

The decision comes as a result of a progressive realization by successive monarchs of the Kingdom of the importance of leveraging the spare production capacity to gain control of the oil market. This shift in policy on the part of the world’s largest oil exporter has several implications for the players in the global oil market. Saudi Arabia’s decision to pursue a long-term policy that would result in a significant increase in the kingdom’s market share may also mean the end of OPEC. The decision was not received well by the major oil exporting countries as the sharp decline in crude prices will diminish their revenues.

Saudi Arabia’s oil and gas giant, Saudi Aramco, will be producing 12 million barrels per day and about 10 million barrels per day will be exported. And in a short span of next few years, Saudi is expected to become the world’s largest producer. This seems easily achievable considering the fact that Saudi has about 25% of the world’s oil reserves and about 70% of global spare production capacity. Undoubtedly, Saudi Arabia is world’s largest crude exporter.

By adopting the new strategy, Saudi Arabia will rise far above its competitors. And the State has the requisite political will and financial feasibility of carrying out what it has planned. To that end, Prince Abdulaziz bin Salman, the kingdom’s energy minister, issued directives to increase Saudi Aramco’s production capacity to 13 million barrels per day in about two years. According to Aramco CEO Amin Nasser, “In a nutshell, Saudi Aramco can sustain the very low price and can sustain it for a long time”. This is because cost of production of oil is relatively much lesser in Saudi Arabia at about $8.98 per barrel. Compared to this, US shale oil costs $23.35 per barrel and that of Russia, $19.21 per barrel. Along with this, Saudi’s net foreign assets of $500 billion give it an unprecedented competitive advantage as the country reorients its oil strategy. Therefore, Saudi can withstand a prolonged period of marginal revenue from oil owing to reduced prices. In fact, Saudi’s Finance Ministry and the Saudi Arabian Monetary Authority (SAMA) are preparing expenditure plans that can withstand oil prices falling as low as $30 per barrel on an average for the next few years.

Saudi Arabia’s policy decision is backed by a very strong political will and the country will not leave any stone unturned in its efforts to achieve supremacy in the global oil market. A very proactive government that has been spearheading multiple reform initiatives is a testimony to that fact.

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