Achtung Naimi

Saudi Arabia is to Opec what Germany is to the EU. As the dominant member of each group, both can talk about reaching consensus in the interests of all, but their economic power means that it will be a consensus set on their terms.

Saudi Arabia’s new Opec consensus is forcing austerity on its fellow members as the price for seeing a new production policy through. So it is fitting that Saudi oil minister Ali Naimi yesterday chose a meeting of the German-Arab Friendship Association in Berlin to reiterate the circumstances behind that policy. “It has always been the aim of Opec nations to work together to do what they can to stabilise prices, ensure fair returns for producers and steady supplies for consumers,” Naimi says.  “In November, I believe Opec made an historic decision. It did not intervene in the market.”

The minister made the supply-side reasons behind this change clear in an interview with Argus in December.  “When prices are rising, or at an historic high, as they have been over the past few years, the global oil industry tends to increase investment,” Naimi says. Investment in US shale oil saw that country’s oil production in 2013-14 grow at a rate matched only by Saudi supply additions in the past, according to the BP Energy Outlook 2035.

“This additional production has come during a period when the global economy is recovering from a deep recession,” Naimi says. “Oil demand growth, particularly in Europe, has been impacted. These factors combined have led to an oversupply.”

But Naimi’s interpretation conveniently sidesteps the fact that it was Opec’s Saudi-led response to the 2008-09 Great Recession that set the foundations for the record high oil prices behind the recent investment boom. Riyadh’s decision to target oil prices of $75/bl while the world was still in the depths of that recession denied consumers the sustained economic benefits of lower oil prices.

Quietly raising that target to $100/bl in the wake of oil supply disruptions in the Arab Spring helped Saudi Arabia and other Mideast Gulf Arab Opec producers to build up the massive financial reserves that should help to see them through the lower oil price period now. But it also reinforced the structural demand-side response to high oil prices by accelerating improvements in fuel efficiency that will be felt worldwide. And higher oil prices stepped up the economic pressure on the emerging markets that will account for the majority of economic and energy demand growth in the future.

“The greatest short-term benefit of lower oil prices is to the consumer and the global economy,” Naimi acknowledges now. “The benefits of lower energy costs are timely for those countries currently facing economic headwinds — including many emerging markets.” The minister says that “Saudi Arabia’s quest for market share is simply an effort to satisfy rising customer demand.”
But structural changes in vehicle efficiency and slower than expected economic growth will make that demand rise slower, and the Saudi quest harder, until its new market policy chokes off supply growth. In the meantime, Naimi wants to keep competitors guessing.

“Some speak of Opec’s ‘war on shale’, others claim ‘Opec is dead’. Theories abound,” he says. “They are all wrong.”

Saudi Arabia ultimately remains committed to market stability, Naimi insists. But his offer of reassurance for consumers comes with a veiled warning to other producers. “We will never be able to curb volatile oil market investment cycles, but perhaps we can work to moderate them for the benefit of all producers.”

Any such moderation will inevitably be on Saudi terms.

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