Talmiz Ahmad :
Oil prices reached a low of $45/ barrel in January, a 60 per cent fall from the highs of $115 in June last year. For this disaster for producers, Saudi Arabia is seen as the villain. Within Opec, it is being vilified for resisting productions cuts at the Opec ministerial in November last year and, after that, for refusing to call an emergency meeting of ministers. The kingdom’s most vociferous critics are those whose economies are in a shambles, largely due earlier imprudent policies (Venezuela) or breakdown in domestic security (Nigeria), and Iran, whose exports, being severely limited by sanctions, desperately needs high prices to maximise revenues.
Outside Opec, some Russian observers have suggested that the Saudis have deliberately depressed oil prices to harm their economy to dilute Russian assertiveness on the Ukraine question, and its confrontationist approach to the West in general. Last year, in the early days of the price fall, US commentators had even gloated that US’s enemies, Iran and Russia, were being systematically emasculated as a result of US-Saudi “collaboration” to bring oil prices crashing down.
But, the American position has changed quite dramatically: now, Saudi Arabia is projected as the villain bent on hurting US interests. Harold Hamm, a major producer of US shale oil, has said that OPEC led by the kingdom is just trying “to wipe out US production”. The head of the Dallas Federal Reserve has asserted that Saudi Arabia “engineered” the oil crisis. US energy analyst Bloomberg has said that the “Saudi price war is paying off” in that “US drillers are idling rigs at a record pace, gutting investment plans and laying off thousands of workers”. Another commentator sees in the Saudi approach “a very profound short-term plan” in terms of which “it will take the pain now rather than later.” The “pain” referred to is the fall in Opec’s revenue from $900 billion in 2013 to $703 billion in 2014, with an anticipated fall to $446 billion in 2015.
US concerns are understandable. There has been a steady decline in the deployment of rigs for shale oil production: a 30 per cent fall in the last four months, and the possibility of a further decline of 35-40 per cent this year. There is mounting evidence of investments of about $ 116 billion being withdrawn and thousands of jobs being lost: many production majors have announced cuts in spending of 20 per cent or more for 2015. US shale oil production in 2015 is expected to be 10 per cent below recent forecasts. There could be adverse medium term repercussions as well when producers, mired in debt, suffer rating downgrades and just cannot raise capital. However, theories envisaging dark geopolitical conspiracies are entirely misplaced: market fundamentals, emerging from a demand-supply mismatch, have caused the price declines, and will continue to be influential in coming years. Over the last 30 years, while Opec production has largely remained constant, its share in the world markets has declined from two-thirds to about 30 per cent today. This is because of significant increases in non-Opec production. However, till recently there had been a balance in world markets due to dramatic increases in demand from the emerging economies of Asia, mainly China and India, and steady but high levels of supplies to Europe, Japan and Korea.
Over the last year, two developments have created an imbalance: the downturn in the global economy that has reduced the demand for oil both in Europe and Asia, and the significant increase in world supply mainly due to US shale oil production: world oil consumption rose by one million barrels a day (mbd) in 2012, and 1.3 mbd in 2013, but grew by only 0.6 mbd in 2014, while US production went from 5 mbd in 2008 to 8.6 mbd in 2014. This created a glut in the market of over one mbd and caused the 60 per cent fall in prices over the last seven months.
Saudi Arabia was under pressure to lead a cut in production. This it refused to do on the ground that other producers, both within and outside Opec, would quickly make up the shortfall, so that the kingdom would lose both revenues and market share without there being any upward impact on prices. It opted instead to preserve market share, even if this meant that prices would remain at low levels. The kingdom calculated that over the medium term, Gulf producers, with production costs of between $4-10/barrel will have competitive advantage over producers of non-conventional oil which needs oil prices of over $75/barrel to breakeven.
The rise in prices to around $60 in February was a response to reports of reductions in rig deployment and investments, which is the reason for recent American outbursts against Saudi Arabia. However, the International Energy Agency (IEA) has warned that this rallying of prices is temporary since there has not been an actual reduction in US oil production. Though stockpiling by China and India could increase demand to some extent even now, we should expect continued turbulence in the oil markets until higher global economic growth, expected late this year or early next year, boosts demand and rebalances the market.
The short point remains that Saudi Arabia, amidst acrimony and vituperation, has steadfastly held its head when all around it were losing theirs.
(The author is the former Indian ambassador to the UAE.)
