By Nick Cunningham, a Vermont-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1. Originally published at OilPrice
In a surprise move, Saudi Arabia sacked its long-time oil minister over the weekend, an event that illustrates the near-total control that the new young Saudi prince has obtained over the country’s energy industry.
For many years, Ali al-Naimi, the outgoing Saudi oil minister, was the voice of Saudi Arabia’s oil industry and policy. Even seemingly insignificant remarks from al-Naimi could move oil prices up or down. But the 80-year old oil minister has seen his power eclipsed by the 30-year old Deputy Crown Prince Mohammed bin Salman. In April, when al-Naimi was forced to backtrack on the Doha oil freeze deal, reportedly at the behest of the Deputy Crown Prince, it was clear that his time at the helm was coming to an end.
Over the weekend, al-Naimi was pushed out in favor of Khalid al-Falih, the head of the state-owned oil company Saudi Aramco. The swap was expected and had been previously announced, but the timing came as a surprise. The move leaves the Deputy Crown Prince with undisputed control over Saudi Arabia’s energy strategy, as well as its broader economy. Prince bin Salman has spearheaded a historic initiative to wean the nation from its dependence on oil revenues over the next decade and a half. His “Vision 2030” for the country calls for a partial IPO of Saudi Aramco, using proceeds to setup the world’s largest sovereign wealth fund in order to invest in sectors of the economy not linked to oil. He also is seeking to raise revenues from other sources besides hydrocarbons, implementing new taxes for the first time.
As for oil policy, however, the ouster of al-Naimi probably does not change much. If anything, it confirms that Saudi Arabia will continue to fight for market share, keeping production elevated in order to bankrupt high-cost producers such as U.S. shale.
And why should Saudi Arabia or OPEC change course? Saudi Arabia decided not to reduce production in the face of oversupply in late 2014 – a strategy, it should be noted, that had the backing of al-Naimi – and while it has taken much longer than expected, forcing prices to crash due to high levels of output is finally beginning to bear fruit. Some sixty-odd U.S. shale companies have declared bankruptcy and U.S. oil production is down almost 800,000 barrels per day from a year ago. More declines are forthcoming. Other non-OPEC oil producers are also reporting declines in output. Production cuts from OPEC would only throw a lifeline to these struggling high-cost producers, a move that would make little sense from the Saudi point of view.
While there may not be noticeable shifts in oil strategy because of al-Naimi’s departure, one thing that is clear is that decision-making is now concentrated in the hands of Prince bin Salman. The new oil minister, al-Falih, is a close ally of the Deputy Crown Prince. He will also travel to Vienna with less influence over fellow OPEC members as his predecessor. Al-Naimi had strong relationships with energy officials from other countries, often able to cobble together a consensus from governments that did not necessarily like each other. It is unclear if al-Falih will be able to do the same.
Ali al-Naimi was also sympathetic to the concerns of other OPEC member nations in regards to low oil prices. Venezuela and Nigeria, among others, pressed hard for production cuts, or at a minimum, a freeze in output. Al-Naimi was open to this avenue, but Prince bin Salman is more hawkish, and seems to be much more content with a period of low oil prices. Naimi was able to countenance coordinated action with OPEC and non-OPEC producers, including Russia. The young prince is taking a tougher line, particularly when it comes to Iran. In fact, many view his opposition to a deal in Doha as at least in part motivated by the Saudi geopolitical rivalry with Iran.
“Mohammed bin Salman has changed everything,” Helima Croft, head of commodities strategy at RBC Capital Markets, told the WSJ. “He doesn’t feel the economic burden to have to cooperate with OPEC.”
In his first statement as the new oil minister, al-Falih said that Saudi Arabia will “remain committed to maintaining our role in international energy markets and strengthening our position as the world’s most reliable supplier of energy.”
The remarks suggest that Saudi Arabia will keep its oil production elevated, or even increase output, for the indefinite future. Saudi Arabia recently sold oil cargoes on the spot market, and as the WSJ reports, the move is significant because it stands apart from the typical approach of selling through long-term contracts. Citigroup interpreted the sale as a sign that Saudi Arabia was looking to ramp up production by some 500,000 barrels per day because spot market sales are easier to pull off in the short-term.
In summary, although the removal of Ali al-Naimi injects uncertainty into the oil markets, the ascendance of the Deputy Crown Prince likely means Saudi Arabia is doubling down on its strategy of pursuing market share.
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if accurate, this problem seems insurmountable: Saudi groundwater “will run out in 13 years” (i’m sure the oil will continue to flow, but ~30 million people will have to find another place to live.)
then there’s the saudi threat to liquidate their treasury holdings. and their plan to build 10 nuclear plants all served by a single man-made canal. (a terrorist’s bonanza, blow up one canal, destroy 10 nuclear plants)
it just gets crazier: Saudi King Salman Financed Netanyahu’s Campaign. Panama Papers Leak
There are deep sea volcanic vents off the coast of SA. It would be expensive to extract it initially, but the amount of fresh water such vents produce is astronomical. It would also ease pressure on the Saudi groundwater.
Deep sea volcanic vents discharging “fresh” not saline water? Where’s the Aquifer? Why is there a positive pressure on that supply of water to vent into the sea?
Please provide link.
larry,
The deep-sea vents are chimneys made of metal compounds that have precipitated out of the vent waters as they encounter seawater. Those vent waters are anything but fresh.
I think at minimum….you Overlook the Saudi ability to build far MORE Desalinization Plants…?
is there a limit? today ten plants will suffice, but in 2030 saudi arabia’s population is expected to hit 39 million.
plus, desalinization is the poster-boy for inherently unsustainable technology. eats up energy. spits out chlorinated/de-oxygenated/heavy-metal contaminated brine. gotta build out a new set of plants every 20 years.
lastly, why nuclear-powered desal? there is no more suitable place on earth to deploy solar desal than saudi arabia.
Or they could use the electricity of those 10 nuclear plants to continue to build the largest desalination plants in the world. Then they can keep pumping into Ghawar.
Concentrated solar can generate desalinated water as a waste product so the (McKinsey?) proposal to build 10 nuclear plants looks more like a financialisation opportunity than a solution to … well anything!
If this is true – I don’t see any reason to doubt it – then there will be a major bloodletting in the markets in the second half of 2016 as a lot of investors are betting on a steady price rise in oil. The worst case scenario for the oil industry is a steady rise in prices through the summer, encouraging another bout of investment and the opening up of drilled and fracked wells for production, followed by another collapse in prices. If rumours are correct that China has effectively filled up all its newly built reserve capacity, then there will be a lot of oil floating around with nowhere to go.
Isn’t oil somewhat like electricity, only some magnitudes slower in system response times?
The reason is that like electricity we can store oil to a certain extent, but, on average the production must match demands. So far the “stability requirement of Production == Demand” has been secured by always having increasing demands. This is just not so any more for many reasons; solar and wind replacing fossils being just one factor, global economic misery another.
Right Now, I don’t see demands being immediately created merely by lower oil prices. New investments in oil-consuming infrastructure could increase demand, but, this will take years and why would anyone bother painting themselves into the same spot they are just getting out off with the year-on-year drop in the cost of solar and wind power?
So, like it happens today with electricity, one keeps stuffing oil into the distribution system and at some point the grid is saturated with no-one able to store or consume any of the excess oil. Oil prices could go negative, like electricity does. *That* would probably not go well with the Saudi’s seeking financing and all to get out from the hole they managed to build for themselves.
One looks forward to discover how negative numbers will play out with the derivatives models and the trade-bots.
The Saudis are blessed with the lowest production costs there are (I think Libya’s were equally low and Libyan crude at least as good but I could be mistaken and Libya is a disaster area today so it’s largely an academic question). Therefore, they can ride the tiger the longest. they know this and are acting accordingly.
Perhaps.
With the “all things being equal”-disclaimer added by the experts and forecasters, they might be right.
Problem is that to be in command in Saudi one has to keep the juice flowing in the agreed amount to the various factions. Even though the Saudis can pump down to 3$ a barrel, the crunch point is likely higher so the regime will have to pump more to meet it’s bezzle-targets.
At some point this is physically impossible. Then they need to borrow.
I think the regime is overconfident and we will see a controlled flight into terrain.
You can almost feel the creaking as they try to prop up the price of gasoline here in the States. Everything is on course it seems for a September/October Surprise as the shale oil industry collapses and demands a bailout. Expect Trump and Hillary to fall in line (Trump under the banner of “energy independence” and Clinton under “jobs”). I saw that one coming months ago.
A meteorologist and amateur astronomer I know wrote us to warn that the smoke from the Canadian wildfires in on its way to the upper atmosphere here in the Northeast. What shocked me is the extent of the fires–640 square miles are burning as I write this. That’s a much bigger deal than I had been led to believe in the MSM. My impression is that Canadian elites are whistling past the graveyard and trying to play down just how bad it is. Perhaps others can tell us more.
I’m not nearly conversant with the geology, topography or thermodynamics involved, but is there anyone in the NC readership who could address the question of whether its possible/plausible for a large bitumen deposit near Fort Make Money to be ignited by the fires, and become impossible to extinguish?
That would be a good example of the snake choking on its tail…
Michael Fiorillo,
I’m not an expert but I can say that the bitumen appears at the surface along the Athabaska River, and I expect other places. Indigenous peoples used it to waterproof canoes, I believe.
Forest fires are normal in the boreal forests of Canada (and Alaska and Russia,) so surface exposures of bitumen in Alberta have been swept over by fires since the boreal forest established itself after the ice melted away. It’s not easy to set the stuff on fire. Luckily.
Whats the fire doing to the Perma frost below it? No one reporting this aspect.
According to the map on wikipedia, the permafrost doesn’t extend that far south.
I’d like to read more about the implications of this move by the Saudis in relation to the lifting of the Iranian Sanctions. Has their oil hit the market yet?
The critical raison d’etre for the Saudi continuation of a scorched earth policy against its competition has been repeatedly stated, but for some reason not comprehended. The Saudis are going to be THE Reliable source of oil, because they are not worried about supply peaking, but DEMAND peaking. They are going to hurt OPEC by already being the cheapest source of crude, and they can continue to afford to do so. They do not have to crack a rock formation or go into deep water drilling with high cost investments for vulnerable coastal drilling platforms. Other than Venezuela, the founder of OPEC and the only comparable competition for the Saudis with enormous crude reserves that can be cheaply recovered, the Saudis will not have many competitors left. And when it comes to reliability, no one is looking to Venezuela for the technical expertise and proven engineering capacity to annually increase extraction in the same class with the Saudis. Both nations may have political instability as background noise, but only the Saudis seem to have proven ability to make capital investments in crude production and delivery that can not be matched.
What they are ensuring is that as much competition as possible will be put out of business and those that are not, considerably weakened in their capacity to find, extract, refine and deliver crude oil and its products. As demand peaks, due more to the displacement of the internal combustion engine by electric motors, the lowest cost oil producer will be the last standing to provide, if not for energy, for critical feed stock for petrochemical industries and agriculture.
While the sun is setting on oil and natgas as a fuel to burn for industrial power, it has not gone unnoticed that as the raw material, unburned, it will remain in high demand, just not as high and as profitable as when every car, truck, jet and boat relied on crude oil exclusively. The diminished demand for industry will still be a highly profitable business for the Saudis, just not for the nations that require $100/barrel price to go after tight oil, deep sea oil, or Arctic oil. By continuing to increase production and bringing onto the spot market crude oil, competition will be squeezed out of existence. And economic and political consequences for OPEC do not seem to be of any concern. I don’t see a helping hand being extended to Venezuela to get through this trying time, does anyone? Only the Saudis have the money in the bank and the ability to raise more cash, of the currency of their choice, by taking ARAMCO public. This younger prince seems willing to embrace change and adapt in order to remain in control of power within his country and to still have geo-political influence. OPEC’s greatest geo-political power was flexed in the face of the USA during the 1970’s oil embargo. As the global power of the US wanes, so does that of OPEC and Saudi Arabia. Adaptation to new geo-political realities as well technological consequences for transnational markets for crude oil, demand destruction, in the face of emerging solar, wind and geo-thermal power sources could only happen from the younger prince, not the older generation that always seems to be the last to know.
http://cleantechnica.com/2015/04/21/bloomberg-big-oil-losing-grip-auto-industry-demand-destruction-part-fall-oil-prices/
Paul Tioxon,
Saudi Arabia has even less to fear from competition from Venezuela than you describe. As though the horrendous mess in the country were not enough, the huge oil resources of the country are mostly heavy oil with properties very similar to the bitumen of Alberta’s oil sands, and deeper and more difficult to recover by far. Cheap they ain’t.
The lack of technical expertise and engineering capacity you mention traces back to the beginning of the flight of educated and experienced members of the oil industry from Venezuela under Chavez, which has continued and may now be picking up speed. Plus, in the last couple of weeks the two largest oil-service providers, Schlumberger and Halliburton, have curtailed activity in the country because they aren’t being paid (and, likely, because of conditions there overall.) They have, in large part, made possible what production there has been. It will be a long time before PDVSA, the national oil company, can even begin to overcome the devastation.
All this may be behind their plans to sell stakes in major government entities, including up to 5% of Aramco. The true market value of Aramco is unknown because of volatile oil prices and unclear long term estimates of future Saudi oil production, but what is known is the Aramco projected sale date of 2020 matches the date IMF estimates the kingdom will run out of Financial Assets.
To give proper attribution, Don Quijones covered a lot of this in his Wolf Street post:
http://wolfstreet.com/2016/05/07/saudi-arabia-cash-flow-oil-bust-unpaid-bills-layoffs/
Proceeds of petrodollar theft to invest in the cartel operation in New sectors.
The world of machines strings together motors, transforming electrical to mechanical energy, and generators, transforming mechanical back to electrical, to replace human production with automation, to leverage human consumption, redistribution over which consumer teams compete to pay higher taxes to the money printers controlling the machines, because they haven’t bothered to learn better.
Life transforms light energy to chemical energy, creating a string of food energy leading to humans, an atmospheric prism feeding the plant prism feeding the animal prism, with bacterial regulation. All human power systems short photosynthesis to produce electricity for machines for consumption, replacing humans and the food chain supporting them. A more equitable distribution of consumption through right granted by the state solves nothing.
DC technology completes the implosion circuit by eliminating all human involvement, replacing the programmers themselves with AI, a bridge collapsing
At both ends. Studying the psychology and genetics of stupid gets you nowhere. Politics is just religion shorting itself out, automating the subjugation of humans to machines, with growing inequality as best business practice. The more the critters fight for equal rights from the perspective of consumption, the greater the income inequality.
By voting to enforce compliance with public healthcare, education and safety, Fed by the Family Law prism of feudalism with no due process, the majority has voted to kidnap my children, confiscate my assets and tax my income at 100%. Why shouldn’t I let physics run its course, and push the prison of its own construction over the cliff?
Find a better AI guy, if you can.
RE inflation is a tax on production. Replacing domestic tax with trade tax, to swap the perceived direction of flows gets you nowhere, as does printing, discounting the debt, defaulting, or replacing the monetary theory, all misdirection for the feudal fiscal policy of RE inflation and self selective confiscation, through bankruptcy law.
I think Saudi Arabia may be in worse shape than many people realize. The country seems to be experiencing a serious liquidity shortage resulting from falling oil revenues. Their current cash-flow needs may require them to maintain oil revenues at current production levels, regardless of the long term impact to oil prices.
The Institute of International Finance estimates Saudi Arabia needs an oil price of $104 a barrel for its Government budget to break even. I suspect the country is currently filling this budget shortfall with the sale of U.S. and European Financial Assets from its national nest egg (Saudi Arabian Monetary Authority Investments). The IMF estimates Saudi Arabia could run out of Financial Assets to fill this shortfall within 5 years in 2020:
http://www.bloomberg.com/news/articles/2015-10-21/saudis-risk-draining-financial-assets-in-five-years-imf-says
The tangible effects of this financial shortfall are starting to show. Last week the Binladin Group (yes that Binladin family), one of Saudi Arabia’s largest employers, laid off 12,000 Saudi employees and 77,000 foreign workers in the kingdom. What’s interesting here besides the fact that firing large numbers of Saudi workers is unusual, is that 50,000 of the 77,000 laid off foreign workers refuse to leave the country because “they have not been paid for at least four months”:
http://www.middleeasteye.net/news/over-10000-saudis-fired-struggling-construction-giant-binladin-362509602
Also, the Government of Saudi Arabia owes hundreds of millions of Euros to a group of Spanish builders which haven’t been paid since November 2015 for their construction of a €6.7 billion high-speed rail link between Medina and Mecca:
http://translate.googleusercontent.com/translate_c?depth=1&rurl=translate.google.com&u=http://www.expansion.com/empresas/inmobiliario/2016/05/06/572c92bc268e3e4d4d8b467f.html&usg=ALkJrhh8PY9wXqQvJRg4vkWrfnYT6yF9XQ
All this may be behind their plans to sell stakes in major government entities, including up to 5% of Aramco. The true market value of Aramco is unknown because of volatile oil prices and unclear long term estimates of future Saudi oil production, but what is known is the Aramco projected sale date of 2020 matches the date IMF estimates the kingdom will run out of Financial Assets.
To give proper attribution, Don Quijones covered a lot of this in his Wolf Street post:
http://wolfstreet.com/2016/05/07/saudi-arabia-cash-flow-oil-bust-unpaid-bills-layoffs/
If you submit the same content under different names to game Skynet, you’re training Skynet to believe you’re a spammer, because that’s one of the things that spammers do.
Mckinsey has been pushing a program to save the Saudi Arabian economy since 2015:
http://www.salon.com/2016/05/06/saudia_arabia_is_in_serious_trouble_americas_partner/
http://www.mckinsey.com/global-themes/employment-and-growth/moving-saudi-arabias-economy-beyond-oil
Whenever you use the word “save” in a sentence with McKinsey there is either bitter irony or sad cluelessness. I’m still trying to figure out which of these pertains to your sentence. As someone who thinks Saudi Arabia is the fountain of all jihadi movements I was elated to find out that McKinsey had their hooks in them. Can the end of state support for the Wahhabi death cult be far away?
You are not going to beat the petrodollar with the same RE inflation.and bankruptcy fiscal policy, another monetary theory, and shorting oil itself with another photosynthetic short, to enable more pathways for planned obsolescence, what is now called green energy.
Driving the herd into global port cities for more make work jobs and occupying the countryside with best government practice is the disaster, humanity shorting itself.
Why would you bet against yourself?
“Why would you bet against yourself?”
Because the people doing the betting don’t see themselves as being part of that humanity. They are above the consequences of their own actions. Or at least believe themselves to be.