Saudia Arabia staying with current oil strategy

Getty Images

Getty Images

Saudi Arabia, OPEC’s largest producer, is continuing its course from last November and will not reduce oil production to stabilize prices. Since then oil prices have collapsed from $115 to $50, and the kingdom’s economy has been hurting. OPEC is meeting in Vienna on December 4th and despite the economic pinch, there is no intention of reversing its policy of reducing supplies to stabilize prices. “The only thing to do now is to let the market do its job. There have been no conversations here that say we should cut production now that we’ve seen the pain,” said Khalid al-Falih, chairman of the state-owned Saudi Arabian Oil Company.

The policy of not reducing production to manage price was created by oil minister Ali al-Naimi and approved by both the current King Salman as well as the late King Abdullah. The reasoning is that in the past OPEC cuts in production created a situation where higher cost oil producers have been able to thrive. The old policy supported high oil prices that made them economically viable. Led by Saudi Arabia, OPEC plans to produce as much oil as possible to supply global demand. This strategy is not without criticism but has been dismissed by Saudi and OPEC officials that any reduction in their production would have resulted in increased production from other sources.

The current oil prices have resulted in hundreds of billions in projects being put on hold. However, Saudi officials are convinced that their strategy will prove correct when demand pick up again, and prices recover. They predict that starting next year the market will start to balance out, and increasing demand will start cutting into stored oil reserves. This strategy is estimated to help oil prices recover to about $70-$80 per barrel.

Additionally, low oil prices have severely cut into government revenue, and a 20 percent budget deficit has forced the government to dig into its financial reserves. Officials are also working on a more sustainable strategy to curtail spending, which has ballooned in recent years. This has happened against a background of increased government spending and has prompted severe cuts. Infrastructure projects have been delayed, and subdued government spending is now slowing down the private sector.

Government officials acknowledge that the severity of the decline in the price of oil has been worse than anticipated and cite an overreaction by the market. In the past, new projects were deferred, and now oil producers are cancelling projects. This lead some to believe that when demand is higher than supply prices will jump in the future.

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