The standoff over Saudi production policy

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At present, foreigners from all walks of life, including the US President, are trying to lead Saudi oil policy. Unfortunately, two sons essentially contradict each other. Many politicians, scientists and climate activists insist that Saudi Arabia should not invest in additional oil production capacity, while at the same time politicians, economists and consumer activists are asking them to ” increase production.

The dueling headlines bear witness to this: “The Saudis resist calls to reduce oil investments. “WSJ 23 / 10-24 / 21 a9 and” White House calls on OPEC to increase oil production as gasoline prices rise “CNBC 8/11/21. In response, the Saudis announced a plan to achieve net zero carbon emissions by 2060, but in the short term they chose not to increase production beyond what has already been agreed with his colleagues at the ‘OPEC +.

This is reminiscent of the 1978 visit of US Secretary of Energy James Schlesinger, who explained to the Saudis that underground oil was worth more than money in the bank, at the same time that he called on them to invest in more capacity. production. In other words, pushing them down a path he deemed unwise.[1] They did not accede to his request, luckily for them, as OPEC’s demand for oil collapsed soon after, when the Iranian revolution tripled prices and plunged the world into recession. (Figure below)

And the advice that oil should be left in the ground because its value would rise more than a financial investment like treasury bills was not very good. As far as I know, it was based on an article that looked at oil prices over a four-year period when US inflation was high, the dollar was falling, and therefore yields on Treasuries were poor for foreign investors. When oil prices are high, it seems that holding oil offers a good return, especially when compared to a period of low prices: from 1998 to 2008, the price increased by 19.1% per year in- above inflation. From 2010 to 2020, the price fell by 8% per year.

Until recently, the EIA assumed that any demand for oil that could not be met by the rest of the world would be met by Saudi Arabia. The figure below shows how DOE’s assumptions about Saudi Arabia’s future production capacity have evolved (actual production has not been broken down by OPEC country). As global demand for oil increased, it was assumed that Saudi production would increase dramatically; instead, Saudi Arabia’s oil needs have repeatedly fallen below expectations, often dramatically.

It’s unclear how much money Saudi Arabia has lost by investing in capacity that hasn’t been used, but even though they hardly considered the DOE’s (and others) forecasts to be reliable, it Surely it was tens of billions – money they would no doubt wish they had. now. (I would of course.)

Which brings us to the present and to the argument that investment in oil production must stop if the global “NetZero2050” goals are met. As I mentioned before (and a future EPRINC paper will detail this), even in the very unlikely event that this scenario does occur, it will likely mean less investment in the private oil industry and a shift in production to the United States. Middle East and Russia. However, if the Saudis and other producers in the Middle East accept the IEA NetZero2050 scenario (which seems doubtful) and let their capacities decline, other producers like Russia are likely to keep production. Because after all, demand is not driven by supply: if the Saudis, Exxon or anyone else do not produce oil, consumption will not be affected unless no one produces the oil and prices go up. sharply. More likely, the war on the oil supply will be as successful as the war on the narcotics supply.

So what should the Saudis do? Of course, they should diversify their economy, it is almost always a winning economic strategy. But all past economic leaps have required capital, and while the United States has obtained much of it from British lenders (sometimes fraudulently), the Saudis should view oil revenues as a vital resource for their economic agenda. Oh wait, that’s what they’re already doing.

[1] Described in Adelman Genie Out of the Bottle, MIT Press, 1995.

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