The Financial Express

Economics and Saudi oil output curbs

| Updated: October 21, 2017 16:12:43

Economics and Saudi oil output curbs
Saudi Arabia, the world's top oil exporter and de facto leader of the OPEC oil cartel, was determined so far to protect its global oil market share by continuing the on going level of production. And that has contributed to a slump in oil prices to 13-year lows. However, Saudi Arabia and Russia said on February 16, 2016 that they would freeze output if other major producers do the same amid the first sign of OPEC and non-cartel producers working together to that end since the rout began. Jason Tuvey, an analyst at research firm Capital Economics said the move may be a signal from Riyadh that the fall in oil prices has gone too far. He said that "They are obviously feeling the pain, particularly with a fiscal squeeze now well under way".
Analysts say that the growing pain of plunging oil prices has galvanised Saudi Arabia to look beyond its rivalry with Russia and Iran over regional conflicts and pursue cooperation on production. As mutual suspicions remain deep and the Sunni-ruled Gulf kingdoms are loath to cede market share to Shiite Iran as it emerges from years of sanctions there are doubts about whether it will last ultimately. Kuwait, Qatar and Venezuela also agreed to the output freeze. The OPEC's second-largest producer Iraq said it was prepared to cooperate while the UAE gave its backing. Returning to world markets as sanctions are lifted under a nuclear deal Iran said after talks in Tehran that it too supported the move. But it stopped short of committing itself to any production curbs. The rare show, even so, of cooperation between the Middle East's foremost Sunni and Shiite powers, which back opposing sides in Syria and other conflicts, sent oil prices soaring on global markets.
Like Iran, Russia is backing Syrian President Bashar al-Assad against rebels supported by Saudi Arabia. But oil expert Jean-Francois Seznec of Georgetown University said political and military rivalries will not kill the output deal since both sides need money. He said that they "can cut production, increase income and still fight each other. A valid (oil) deal would make it easier to talk about a settlement in Syria". But Saudi Arabia said on February 18, 2016 that the freeze plan did not mean it was considering reducing output. Saudi Foreign Minister Adel al-Jubeir told, "If other producers want to limit or agree to a freeze in terms of additional production that may have an impact on the market but Saudi Arabia is not prepared to cut production. The oil issue will be determined by supply and demand and by market forces. The kingdom of Saudi Arabia will protect its market share and we have said so."
Saudi Arabia, which is also leading an expensive military campaign against Iran-backed rebels in Yemen, posted a record US$98 billion budget deficit last year i.e. 2015 and it expects a deficit of US$87 billion in 2016. That will force it to introduce a series of austerity measures including cuts to subsidies on fuels, electricity and others. The International Monetary Fund (IMF) has cut its forecast the lowest in seven years for Saudi economic growth to just 1.2 per cent in 2016. On February 17, 2016 Standard and Poor's downgraded Saudi Arabia's credit rating for the second time since October 2015. Saudi economist Abdulwahab Abu-Dahesh said, "Saudi Arabia and other Gulf states are certainly suffering from low oil prices although they have strong fiscal buffers. They need higher oil revenues to reduce pressures on their currencies, domestic consumers and public spending".
After announcing the output deal in Doha, Saudi Oil Minister Ali al-Naimi insisted that low oil prices were not a problem for the kingdom. Riyadh has fiscal reserves of more than US$600 billion. Other Gulf countries within OPEC also have large cushions, but other members such as Algeria, Nigeria and Venezuela are not that fortunate. Russia has seen its recession-hit economy severely damaged by the price slump while Iran has suffered huge losses because of sanctions that shut off its access to much of the global oil market. But Seznec said, "The fact that Russia and Saudi Arabia are talking is a big plus" for oil prices. Analysts say that the battle for market share and mistrust remain the most serious obstacles to a lasting and effective deal.
Abu-Dahesh said that while Saudi Arabia is willing to cut production if it sees that others will follow, it doubts if Russia will do so. He said, "Saudi Arabia simply does not trust Russia or Iran because of political and economic rivalries. I don't think Gulf States want to lose their market shares to Iran. I believe that the fight for market share will only intensify". Another report adds: Saudi Arabia is "not prepared" to cut oil production, its foreign minister said on February 18, 2016, after the top exporter agreed with Russia to freeze output if major rivals follow. Especially in an attempt to drive less competitive players out of the market, Saudi Arabia and other OPEC producers have refused to reduce output. After prices fell around 70 per cent since mid-2014, Saudi Arabia and Russia said on February 16, 2016 that they would freeze output if other major producers do the same amid the first sign of cooperation among OPEC and non-cartel producers. Following talks in Doha, countries like Kuwait, Qatar and Venezuela also agreed on the planned freeze. Iran - Saudi Arabia's regional rival - surprised markets by saying that it too supported the move, sending prices soaring. Iran's comments were seen as significant as it returns to global markets following the lifting of international sanctions.
The writer is a retired Professor of Economics, BCS General Education Cadre.

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