Creating new perspectives since 2009

Oil and war: The current Saudi challenges

July 16, 2015 at 12:27 pm

The Saudi minister of petroleum played a vital role in maintaining the production levels of the Organisation of Petroleum Exporting Countries (OPEC), which amounts to 30 million barrels a day. He proposed this during the organisation’s meeting in November 2014 in light of the fall in prices and availability of petrol in the market.

At the time, this decision was met with widespread criticism. Some considered this move to be a big sacrifice made in order to achieve political gains that are not guaranteed. Others believed that this step would cause troubles for the Kingdom.

Despite this, Saudi Arabia continued to insist on their previous position during the OPEC’s meeting on 5 June through their minister of petroleum. During this meeting, he decided to expand the current levels of production during the second half of the year. He explained that he would open the door to continue dealing with the shocks of the market, meaning that the Saudi oil situation will “heal on its own.”

The Saudi minister recently stated that the strategy of preserving the OPEC producers’ share in the market will lead to a slowdown in the supply coming from “marginal areas”, as some members are seeking to reinforce this strategy. This means that the petroleum production of countries outside of OPEC, which revives the demand, will slow down. This statement is not in line with many facts, including the fact that there is always a petroleum surplus in the international market, amounting to over 1.2 million barrels. This hinders any chance of potential growth in the prices.

As for the theory of reviving the price cycle by means of shocking the market, in order for the cycle to settle in the desired range between $80 and $100 per barrel, there are too many factors that do not allow for optimism in this regard until the end of the first half of next year, at the very least. Such factors include the sharp decrease in global economic growth, which only reached three per cent, and this may continue over the upcoming period. Another factor is the ability of the American shale oil to stand up to the decline in prices, making a noticeable increase in production this year. In addition to this, the increased production of countries outside of OPEC is also a factor. Add to this the potential for reaching a nuclear deal with Iran, followed by the gradual lifting of the ban on exporting crude oil, as the Iranian minister of petroleum has already begun pressuring the organisation to allow it to increase its share of production in the event that the ban is lifted on its exports. All of these factors do not indicate or suggest a recovery in the prices at the desired levels. On the contrary, they confirm that the prices fluctuate to very low levels, reaching $60 per barrel.

This of course put onerous challenges in the face of the Kingdom’s economics, which is already burdened with exceptional commitments, including footing the bill for the military efforts in Yemen and generally facing the situation in the region. This forces Saudi Arabia to study some of the political and economic measures strategically in order to manage the current situation and face any future consequences.

These measures include, first and foremost, the reconsideration of the country’s public spending for non-military matters, as well as freezing or postponing some economic projects, along with decreasing its funding of foreign parties in the form of aid and support. This will also be accompanied by the intensification of the military campaign in Yemen in order to attempt to reach solid and quick solutions and results. We must not rule out the fact that Saudi Arabia may reconsider some political files and may deal in a realistic manner with “sensitive situations” in the context of the complicated crisis in north and south Yemen.

On a parallel path, the Kingdom began launching efforts that are expected to continue the growing steps to reach a rapprochement with the Russian Federation in order to maximise the countries’ bilateral interests. This aims to create practical necessities for mutual cooperation on various paths. The most important interest is reaching serious agreements to resolve some of the main security files. The Kingdom does not hide its quest to reduce the excessive dependence on the United States in dealing with the raging situation in the Arab region. Many following Saudi affairs believed that the Kingdom is activating its strategic resources and working to build the necessary alliances in the Arab and Muslim region, as well as building bridges in various directions in order to overcome this phase.

No one claims that the Kingdom has transparent and definitive plans, especially to face the economic challenges resulting from the circumstances experienced by the region at the moment. There is also the challenge of the decline in crude oil prices which dropped dramatically from $115 last June to $45 this January in America. In addition to this, the soundness and effectiveness of Saudi Arabia’s production strategy is still uncertain. Despite this, Saudi Arabia remains a central force in the region and is prepared to deal with these emergency situations. Therefore, it possess enough political and economic options to face the foreign challenges, but on the other hand, there are still major needs in the context of the necessary comprehensive reforms on every level in Saudi Arabia in order for the country to remain a major and important pillar for the stability of the region and the world. This poses the greatest challenge for the time being and in the foreseeable future.

Translated from Al-Quds on 15 July 2015.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.