Saudis move to push oil prices higher, in break from past policy

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  • Sunday, 06 May 2018

DUBAI: Saudi Arabia is maneuvering to push oil prices up to at least $80 a barrel this year, shifting away for now from its long-time role as a stabilizing force in global energy markets.

Crown Prince Mohammed bin Salman, the country’s day-to-day ruler, is behind the move, aimed at raising revenue as his government seeks to carry out a wide-ranging economic overhaul, senior Saudi officials said.

The Saudis already have helped drive oil prices up nearly 50% in the past year—to nearly $74 a barrel on Friday for Brent crude—by engineering a large output cut with the Organization of the Petroleum Exporting Countries and Russia.

By aiming to force prices even higher, Prince Mohammed is stepping away from a compact that has defined the kingdom’s foreign relations for decades—offering stability in oil prices in exchange for security assistance from the U.S. and other big energy consumers.

That equation has been changing with the rise of American shale-oil producers, a diminished U.S. appetite for Middle East military action and the ambitious, expensive agenda of the 32-year-old crown prince to modernize his kingdom.

“There is no intention whatsoever from Saudi Arabia to do anything to stop the rally” in oil prices, said a senior Saudi government official, who cited the minium $80 estimate. “It is exactly what the kingdom wants.”

For every dollar that oil prices rise, Saudi Arabia gets about $3.1 billion a year in extra revenue, according to Rapidan Energy Group, a Washington consultancy. That cash infusion comes as the Saudi economy goes through a rough patch that shows just how dependent it remains on oil.

An austerity plan imposed when oil prices were lower levied new taxes on and stripped government support from regular Saudis, depressing consumer spending. The Saudi economy contracted in 2017 and is forecast to be an anemic 1.7% in 2018, largely because it has cut oil output with OPEC, according to the International Monetary Fund. Rising oil prices are driving a gradual economic recovery. Saudi crude exports have risen in recent months but down significantly from 2016.

More oil revenue would also give Prince Mohammed some time and money to proceed at a slower pace with other economic reforms. The government has delayed the centerpiece of his plans, the initial public offering of state-energy giant, Saudi Arabian Oil Co., or Aramco, which had been expected to raise tens of billions of dollars this year for the kingdom to invest in non-oil sectors.

“It gives everyone time to breathe,” a second senior Saudi official said of higher oil prices.

Saudi officials are prepared to drive oil prices higher in June when they push for a continuation of OPEC’s output limits with Russia. They have also proposed scrapping the nuclear deal with Iran and reimposing sanctions on its oil, which could drive prices up further. And Saudi officials have privately floated their desire for higher prices in the media, which helps push prices up.

Officially, the Saudi government says it is agnostic about the price of crude. But Saudi energy minister Khalid al-Falih signaled the kingdom’s posture last month at an OPEC gathering in Jeddah, where he said higher prices wouldn’t affect oil demand yet.

“I don’t see any impact on demand with current prices. We have seen prices significantly higher in the past. Twice as much as where we are today,” he said.

That stance has rattled some oil-consuming countries, including the U.S., where President Donald Trump recently weighed in on Twitter with a warning that oil prices were “artificially very high.” Average U.S. gasoline prices in April neared $3 a gallon, their highest levels in three years.

Brent, a North Sea crude against which internationally traded crude is priced, has breached $75 a barrel this year for the first time in over three years. West Texas Intermediate, a crude used to price American oil, has flirted with the $70 a barrel mark.

In the past, the Saudis have worked to cool off oil prices as they heated up in 2008 and 2011, although not always successfully, knowing that moderately priced oil kept demand high and helped blunt a drive towards renewable energy. The Saudis often argued with OPEC members like Iran and Venezuela, which pushed for ever higher prices.

Back then, though, Saudi government spending was lower. From 2000 to 2014, Saudi Arabia needed an average oil price of about $75 a barrel to cover its government spending, according to the IMF.

In 2018, the IMF says, Saudi Arabia needs oil prices at over $87 a barrel to balance its budget. Prince Mohammed unveiled a record $260 billion budget last year, as the kingdom fights a costly war on its southern border with Yemeni rebels and supports growth in non-oil industries with subsidies.

The Saudi alliance with the U.S. remains strong as both move to contain Iran in the Middle East. The U.S. imported about 667,000 barrels of Saudi oil a day in February, among the lowest levels since the 1980s.

To be clear, Saudi Arabian officials say, they would step in with more production if prices suddenly soared. That would likely include increasing production and replacing Iranian output should Mr. Trump end the nuclear deal and re-impose sanctions on Tehran’s oil industry. Prices of $100 a barrel remain a psychological barrier the Saudis don’t want to hit, people close to the kingdom say.

Saudi Arabia could face some resistance from fellow oil producers to pushing prices up too high, too fast.

Iranian oil minister Bijan Zanganeh told The Wall Street Journal in March that oil prices around $60 a barrel were ideal, setting up Tehran on the opposite side of a crude-market debate with its regional political rival, Riyadh.

Russia, which isn’t an OPEC member, has also been more cautious about pushing for higher prices.

Some oil-industry analysts close to the Saudis say the kingdom is trying to stave off a future oil-price rise by nudging prices higher today to encourage more investment in the energy industry.

Mr. Falih has warned that oil supply could fall short of demand in the near future if companies don’t invest in more drilling projects. Despite a 50% surge in prices since last year, drilling budgets at the largest global oil-and-gas companies are up only about 7%, according to consultancy Wood Mackenzie.

“They want more investment,” said Bob McNally, the president of Rapidan Energy, who speaks with Saudi government officials. “The consequences of Saudi policy now is higher prices, but if you could have more investment at $65 a barrel, they would want $65.”

There are risks for the Saudis in higher oil prices. The government peeled back energy subsidies this year, exposing regular Saudis to the higher gasoline prices that come with rising oil prices.

“I’m not just hurt by these price hikes, I’m going mad over them,” said Abdulaziz Mohammed, a 29-year-old event-management employee as he bought gasoline at a fuel station in Riyadh. Filling up the tank of his Infiniti sport-utility vehicle costs the equivalent of between $30 and $40 for a tank now, about twice as much as last year.

The IMF warned this week that strong oil prices could cause the Saudi government to slow down its economic reforms. And there is the prospect that Mr. Trump will put the pocketbooks of American drivers ahead of his strong alliance with the Saudis, should prices rise too high.

Jim Krane, an oil and geopolitics fellow at Rice University’s Baker Institute in Houston, said the Saudi push for higher oil prices is a short-term shift designed to help Prince Mohammed through some challenging times.

“Saudi wants high oil prices for short-term goals like the Aramco IPO, budget deficits, fighting wars, and subsidizing citizens in ways that keep them satisfied with autocratic rule,” Mr. Krane said. “Over the long term, however, the Saudis’ interests align with cheaper oil.” - WSJ

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