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New King in Saudi Arabia Unlikely to Alter Oil Policy New King in Saudi Arabia Unlikely to Alter Oil Policy
(about 3 hours later)
LONDON — The death of King Abdullah of Saudi Arabia early Friday is unlikely to deter the desert kingdom from maintaining a high level of oil production despite the recent sharp drop in prices, analysts said. LONDON — The new king of Saudi Arabia moved quickly on Friday to assure global energy markets that the country would maintain its strategy of pushing other top exporters to maintain a high level of oil production. But a prolonged slump in oil prices, as well as budget pressures at home, will test his resolve.
Saudi Arabia’s policy results from a consensus of the kingdom’s leadership and energy experts, and it will not be easy to abandon, longtime observers of Saudi Arabia say. As the new head of the dominant Middle East oil producer, King Salman bin Abdul-Aziz immediately emerged as the most powerful figure in the global oil patch. Saudi Arabia is the unchallenged leader of the Organization of the Petroleum Exporting Countries, the group of 12 oil-rich nations that has resisted cutting production, contributing to the recent sharp drop in crude prices.
“There is no near-term reason to modify the kingdom’s position,” said Sadad al-Husseini, a former executive vice president and board member of Saudi Aramco, the national oil company, in a telephone interview. The death of King Abdullah, announced early Friday, sparked speculation that Saudi Arabia could shift direction, and prices initially rose 2 percent. Oil prices eased later, though, as the new king said in a televised address that he would stick with “the correct policies which Saudi Arabia has followed since its establishment.”
Saudi Arabia is the most influential of the 12 OPEC members because it is by far the largest producer and the only one with the ability to substantially vary output to affect markets. In December, Saudi Arabia produced about 9.6 million barrels per day, a slight decline from the previous month, but still about 10 percent of the world total. For the immediate future, most analysts say the Saudi royal family will resist any sharp changes in policy, especially as it tries to navigate multiple foreign policy challenges, like the chaos in neighboring Yemen.
Mr. Husseini, who now runs his own energy consulting firm, noted that Saudi Arabia had only fully detailed its position to maintain its oil production quota at a November meeting of OPEC in Vienna and that it was likely to wait for at least several months to see how the policy played out. “There is no near-term reason to modify the kingdom’s position,” said Sadad al-Husseini, a former executive vice president and board member of Saudi Aramco, the national oil company, in a telephone interview. “The kingdom is unlikely to reverse a policy that it has just announced with the outcome still evolving.”
“The kingdom is unlikely to reverse a policy that it has just announced with the outcome still evolving,” he said. King Salman is trying to project stability at a time of uncertainty.
The new ruler, King Salman, who was crown prince and a brother of Abdullah, said in a televised address on Friday that the kingdom would not change course and would maintain “the correct policies which Saudi Arabia has followed since its establishment.” This month, Salman seemed to endorse the current oil policies in a speech given on behalf of his brother. Just two weeks ago as crown prince, he gave a speech on behalf of his brother, in which he endorsed the current oil policies. He blamed weak global economic growth for the plummeting prices. King Salman has also signaled that nearly all cabinet members will remain at their posts, including the oil minister, Ali al-Naimi.
The price of Brent crude, the international benchmark, rose nearly 2 percent to $49.45 a barrel in morning trading, reflecting uncertainty among traders about the continuity of Saudi policy. But the market erased much of those gains after the new king said that policy would remain unchanged. Prices have fallen about 60 percent since June amid a glut of production and slowing global demand. A career Saudi oil man, Mr. Naimi is considered to have a combination of industry knowledge and the political skills to manage the royal family and other constituencies in the kingdom. At the last OPEC meeting in November, Mr. Naimi, the main architect of Saudi Arabia’s current strategy, resisted calls by Algeria, Venezuela and Iran to cut supplies.
During a long career as governor of Riyadh Province, the new king, who is 79, established a reputation as a conciliator among rival factions in the huge royal family, but he has experienced bouts of poor health in recent years. Simon Henderson, a Middle East analyst at the Washington Institute for Near East Policy, said it was most likely that the reins of power, including over oil policy, would be held by a group of advisers now forming around the king. But it remains to be seen for how long Mr. Naimi will remain at his post. In recent years, Mr. Naimi, 79, is said to have told friends that he would prefer to retire and spend time on other pursuits, like his role as chairman of a science and technical university named after Abdullah. But he has stayed on at the late king’s request.
The volatility in oil prices could also complicate Saudi Arabia’s plans.
If prices remain low for a year or longer, King Salman, who at 79 is reportedly in poor health, may find it difficult to persuade other OPEC member to keep steady against the financial strains. The International Monetary Fund estimates that the revenues of Saudi Arabia and its Persian Gulf allies will slip by $300 billion this year.
Even gulf oil officials in recent interviews have said they were surprised by how far and how fast prices have fallen. The expectation appears to have been that a floor would have been found in the range of $50 to $60 a barrel. It is currently less than $50.
There have also been rumblings that younger members of the royal family are not happy about falling oil revenue, which will inevitably eat away at the kingdom’s estimated $750 billion in reserves. Eventual budget cuts could threaten the country’s ample economic safety net, including high-paying public sector jobs and exorbitant energy subsidies.
“Something has got to give,” said Michael C. Lynch, president of Strategic Energy and Economic Research, a consultancy, who has advised OPEC in recent years. “The population understands — up to a point — that they will have to cut back.”
Saudi Arabia is the most influential of the 12 OPEC members because it is by far the largest producer and the only one with the ability to substantially vary output to affect markets. In December, Saudi Arabia produced about 9.5 million barrels per day, its average for the year and about 10 percent of the world total.
In recent years, Saudi Arabia has adjusted its production in what has been a mostly successful effort to keep markets balanced and prices in the $100-a-barrel range. But as prices began falling last summer, the Saudis and their gulf OPEC allies declined to intervene, contributing to the sharp drop. So far, the Saudis and other Persian Gulf countries appear convinced that cutting in an oversupplied market would only benefit other producers.
A long, stable period of relatively high prices has led producers, mostly outside OPEC, to make huge investments in high-cost endeavors like Canadian heavy oil projects and deepwater fields in Brazil, as well as the shale projects that have greatly increased production in the United States. The Saudi and Gulf position is that it will take time for a shakeout to occur among oil producers, which may eventually leave low-cost Middle East producers in a stronger position.
Many United States oil executives blame current Saudi policies for a disquieting bust occurring across the American oil patch. Companies are decommissioning rigs and laying off thousands of workers. They say the Saudis have purposely driven the price of oil down by more than 50 percent since the summer to damp the United States boom in oil shale drilling, which has nearly doubled domestic oil production in the last six years and virtually eliminated imports from several OPEC producers.
“With the new king coming in there is a possibility for change,” said Steve J. McCoy, director of business development for Latshaw Drilling Company of Tulsa, Okla. “If they announce that they are going to reduce their output, within two months we could see an increase in price by at least $30 and get us back to above $75 a barrel. At the current price there just isn’t much economical to drill.”
Gulf oil officials say privately that Saudi Arabia and other OPEC producers have not completely ruled out a cut that might help calm the markets. But the Persian Gulf producers insist that a wide range of countries, including Venezuela and non-OPEC producers like Russia, should participate — a long shot at this point.
“Saudi oil policy is set largely on a technocratic basis,” said Anthony Cordesman, a geopolitical expert who follows Persian Gulf affairs at the Center for Strategic and International Studies in Washington. “There is no major international reason for Saudi Arabia to change its current approach.”
Simon Henderson, a Middle East analyst at the Washington Institute for Near East Policy, said it was most likely that the reins of power, including over oil policy, would be held by a group of advisers now forming around the king.
“Now that he is older, he is likely to take a more hands-off approach, relying on a coterie of advisers, which will probably include several of his sons,” said Mr. Henderson, who has written extensively on Saudi succession issues.“Now that he is older, he is likely to take a more hands-off approach, relying on a coterie of advisers, which will probably include several of his sons,” said Mr. Henderson, who has written extensively on Saudi succession issues.
Salman moved quickly on Friday to begin forming that inner circle. He promoted his son Mohammad bin Abdul Aziz bin Salman as chief of the royal court and private adviser, replacing Abdullah’s chief adviser, Khalid al-Tuwaijri. The king’s son is likely to be a central figure along with another son Abdel Aziz, who is a senior official in the oil ministry.
Ali al-Naimi, who has been the kingdom’s oil minister for 19 years and has been the chief proponent of Saudi Arabia’s policy of maintaining market share, will remain in that position, according to the official Saudi Press Agency.
So far, the Saudis and other Persian Gulf producers appear convinced that their cutting production in an oversupplied market would only benefit other producers. A long, stable period of relatively high prices has led producers, mostly outside OPEC, to make huge investments in high cost endeavors like Canadian heavy oil projects and deepwater fields in Brazil, as well as the shale projects that have greatly increased production in the United States.
The Saudi and Gulf position is that it will take time for a shakeout to occur among oil producers, which may eventually leave low-cost producers in the Middle East in a stronger position.
“We expect the Saudi oil policy to remain consistent under King Salman,” said Richard Mallinson, an analyst at Energy Aspects, a market research firm in London, in an email to clients on Friday.
“While it would be within his power to make dramatic changes and reverse the current policy, there are no indications at present that he might do so,” Mr. Mallinson said. “Saudi Arabia is almost certain to remain focused on the long-term and its future position in the global oil market.”
In recent years, Saudi Arabia has adjusted its production in what has been a mostly successful effort to keep markets balanced and prices in the $100-a-barrel range. But as prices began falling last summer, the Saudis and their Gulf OPEC allies declined to intervene, contributing to the sharp drop.
Even Gulf oil officials in recent interviews have said they were surprised by how far and how fast prices have fallen. The expectation around the Gulf appears to have been that a floor would have been found in the range of $50 to $60 a barrel.
Gulf oil officials say privately that Saudi Arabia and other OPEC producers have not completely ruled out a cut that might help calm the markets. But the Persian Gulf producers insist that a wide range of countries inside and outside OPEC participate in any effort to absorb the glut in the markets — a long shot at this point.
A clue to whether Saudi Arabia will change its stance under the new king will be whether its long-serving oil minister, Mr. Naimi, remains in his role as the new group around King Salman consolidates power.
In recent years, Mr. Naimi, who is 79, is said to have told friends that he would prefer to retire and spend time on other pursuits like his role as chairman of a science and technical university named after Abdullah. But he has stayed on at the late king’s request.
Abdullah’s death might be an appropriate time for the kingdom to switch oil leaders, although there is no obvious candidate to succeed Mr. Naimi.
​There is little sign that Mr. Naimi faces near-term challenges at home. A career Saudi oil man, ​he is seen as having a rare combination of industry knowledge and the political savvy to manage the royal family and other constituencies in the kingdom.
Nonetheless, lower prices and falling income are not good news for an oil minister. Saudi Arabia and its Gulf allies like Kuwait and the United Arab Emirates have surprised many observers by not trimming production in the face of a glut, as has been their practice in the past.
Declining to play the role of swing producer inevitably makes Mr. Naimi a target of anger both inside and outside of OPEC, as oil companies halt planned projects and lay off workers and as oil-producing countries see their government coffers shrink.
The stress on Mr. Naimi, who is usually unflappable, was evident at the November OPEC meeting, when he snapped at at least one journalist asking about the oil market and declined to answer questions during the traditional interview session before the start of the gathering.
While the Gulf producers may have substantial reserve assets to cushion the sharp falls of income, countries like Venezuela and to a lesser extent Algeria, Iran and Nigeria will be squeezed if low prices persist.