Saudi Arabia’s Oil Strategy in a Time of Glut | Foreign Affairs
Along with naming a replacement minister—Khalid al-Falih, the former CEO of the state oil giant Saudi Aramco—the Saudis also announced a significant shift in oil market strategy. The kingdom would not only maintain its brisk pace of oil production of 10.2 million barrels per day but increase it further. Amin Nasser, the current CEO of Aramco didn’t stop there. He said that the theoretical ceiling on Saudi oil production capacity—12.5 million barrels per day—could be expanded in the future.In some respects, signs of the Saudis’ strategy shift were there all along: The country is locked in a battle for market share in the face of a U.S. shale boom, a re-emerging Iran, and a glut of non-OPEC crude. Longer term challenges, such as the threat of hitting a ceiling on global oil demand—perhaps in response to climate change—probably also shape thinking at Aramco headquarters in the eastern city of Dhahran. With 260 billion barrels of proven crude oil reserves still underground, the risk of stranded assets is a scary proposition in Saudi Arabia.
Saudi production decisions are subject to painstaking deliberation over the optimal pace for depleting the kingdom’s reserves. Aramco calibrates output from individual fields so that recoverable oil is exhausted gradually, over a minimum of 30 years. This has a constraining effect on the market. Since 2000, the kingdom’s output has hovered at about 13 percent of global supply, a self-imposed limit that has forced oil prices up. This has allowed higher-cost “fringe” producers to meet remaining demand with costlier oil.
That calculus could change, however, if Saudi energy policymakers believe there will be threats to the long-term value of crude oil, especially in oil’s viability as a transportation fuel. In such a case, the kingdom could recalibrate its depletion strategy.
One threatening scenario stems from efforts to respond to climate change. Some climate-focused scholarship has sought to quantify the amount of “burnable” fossil fuels as a portion of global reserves, given the goal of limiting the rise in temperatures to two degrees Celsius. One recent paper calculates that adhering to the two-degree limit means that the Middle East will see more of its reserves stranded underground—at 38 percent—than the global average of 33 percent. This is due to the large size of Middle Eastern resources relative to its hitherto modest rate of production. By contrast, the United States may find itself with the smallest level of stranded reserves. Only six percent of U.S. conventional crude reserves were estimated as “unburnable,” probably because of the relatively small amount of remaining oil and comparatively high rates of production. From this perspective, Saudi prudence looks risky.
Based on such calculations, it is in producer countries’ interests to beat the trends by stepping up production and shortening the timeframe for converting underground reserves into above-ground assets. This would, if all else held constant, reduce global oil prices and increase demand. For Riyadh, this approach could potentially transfer the risk of stranded assets to higher-cost producers, including those in North America, whose investment plans might be derailed by expectations of low oil prices.
Higher production might also allow Saudi Arabia to reduce its risk from a related “peak demand” scenario. Naimi and other Saudi officials have voiced fears for at least a decade about “security of demand” whether from climate factors or Washington’s rhetoric around “energy independence.” U.S. diplomatic cables released by WikiLeaks revealed some of these concerns, as do Naimi’s public statements and those of an adviser, Mohammed al-Sabban, who predicted that global demand would peak by 2025.