American Oil Companies Dominating Saudi Arabia

September 1, 2016


            One couldn’t fathom a day where OPEC wished to freeze production. It seems like these OPEC miscreant countries are in a position of survival of the fittest. Freezing production may have to do with Saudi Arabia. The country’s once robust economy has moved from a healthy surplus in 2013 to a heavy deficit in 2015. Prices have failed to rebound significantly and threaten the country with the potential for another major deficit in 2016.


            For the first time in 25 years, Saudi Arabia is expected to launch its first international debt sale to raise a sum of $15 billion. This only adds to the 5-year $10 billion worth of loans the country has received from a variety of global banks in April 2016. Additionally, rumors surrounding selling a partial stake in the state-run oil company Saudi Aramco are at an all-time high. The goal of this move would be to reduce the nation’s reliance on oil and to create a sovereign wealth fund. This is rarely a surprise due to the recent downgrade of Saudi Arabia’s sovereign credit rating.


            The real problem is that the Saudis did not anticipate the willingness of numerous US oil companies choosing to not participate in OPEC’s game. Let’s examine the past to establish the sequences of today. Ali-Al Naimi, the former Saudi Arabian Minister of Petroleum and Natural Resources, was the only man courageous enough to tell billionaire Prince Al-Waleed bin Talal to keep quiet about increasing US shale production. At first, Naimi responded by stating he wasn’t concerned about increasing US output from shale formation.


            Prince Al-Waleed changed his tune, “The world’s top oil exporters should start worrying about the recent slide in global oil prices.” He warned against such a negative effect of such a drastic drop in oil as it would reduce state revenue for Saudi Arabia. Al-Waleed estimated that 90% of the 2014 budget was based on oil and the implications of a price decline would be disastrous. He warned that world oil supplies were in excess of demand and that crude oil at $125/barrel was simply unsustainable.


            “My only mission is to convey to you that there is no supply shortage in the market. We are ready and willing to put more oil on the market, but you need a buyer. We really don’t understand why oil prices are behaving like this. Supply of oil is now outpacing demand by over a million barrels/day and customers are not asking for extra crude,” stated Ali-Al Naimi in 2013.


            At the time, the Venezuelan Minister of Energy and Chairman of Rosneft travelled to Vienna seeking a cut to oil production. Naimi of Saudi Arabia refused to cut oil production leaving Venezuelans furious. However, Rosneft’s approach was rather different. Rosneft sent out a press release indicating they too wouldn’t cut oil production. Rosneft proceeded by asking for a $49 billion loan from the National Russian Welfare Fund, which was about 60% of the total fund’s value. This damaged Russia’s position as the continued oil price decline continued to hurt its Ruble. 


            Obama may have played the good hand in geopolitics. The only way Obama could have punished Russia was exacerbating the decline of oil prices. John Kerry’s meeting with the late Saudi Arabian King Abdullah could’ve resulted with an agreement to bring down oil prices.


            Today, Saudi Arabia put themselves in a position of never elevating themselves in becoming a swing producer of oil. The large deficit has made it virtually impossible for Saudi Arabia to establish a common ground with Iran and Iraq that need the revenue even more than Saudi Arabia itself. Iraq’s Prime Minister stated, “We support freezing oil production by OPEC due to the sharp decline of oil prices.” Even though he has indicated this, the chances of it occurring are slim to none because of the competition between the countries to gain China as a buyer.


            The scenario is based on the prisoner’s dilemma. Each of these countries competes with each other by undermining other producers. The most favorable collusive scenario will never play out due to the power of greed. Ultimately, this will result in the most unfavorable solution leaving all OPEC countries to suffer.


            Just over two years ago there was a large abundance of oil with prices at $125 per barrel. Psychologically, the market never tuned in to the oversupply until Ali Al-Naimi opened his mouth. When Naimi indicated of the situation at hand, his intentions were based on the king himself. Saudi Arabia lost their position in the geopolitical world and there’s simply no coming back to it.




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