Well mindful
of the consequences of this policy, the US government recently announced it
would tap its Strategic Petroleum Reserves (SPR) to compensate for shortages in
the market once sanctions against Iran’s petroleum sector have snapped back
into place.
The Trump
administration has left no stones unturned and ratcheted up the pressure on
OPEC member states in a bid to win them over in its anti-Iran oil policy.
Traditionally close ally of the US, Saudi Arabia is counted on by President
Trump for maintaining oil market balance.
Due to
political hostilities, Saudi Arabia has every reason to be on the US side in
its anti-Iran campaign; however, Saudi is faced with numerous restrictions and
challenges for oil production and exports.
**Challenges
& Restrictions
In case the
US manages to reduce Iran’s oil exports to zero, other oil producers will have
to supply 2.7 mb/d of oil on a sustainable basis. Saudi Arabia has welcomed the
US decision, but the fact is that Riyadh is facing a variety of restrictions
and challenges in that regard.
Since Saudi
energy policies have always appeased the US and Western governments, most
energy centers have been widely covering Saudi Arabia’s claims in a bid to
introduce it as OPEC’s kingpin and world oil market leader. That is why the International Energy Agency
(IEA) has released unrealistic and exaggerated predictions about Saudi oil
output on many occasions. Saudi Arabia has for years ranked the first in the
world in terms of crude oil reserves and production capacity; however,
realistic forecasts call into question data presented about the Arab nation’s
crude oil reserves. In its Changing Wealth of Nations 2018 report, the World Bank
has said that Saudi Arabia would have oil for 80 more years, which is far less
than the survival rate given for Iran, Venezuela, Libya, Canada, Iraq, Kuwait
and the United Arab Emirates (UAE).
Saudi
officials are undoubtedly well aware of their genuine data about oil reserves.
They cannot simply jump into the fray and supply more oil to reduce their own
reserves. In fact, the Saudis’ long-term policy of political and economic
exploitation of oil would pose a serious obstacle to their unbridled use of oil
resources.
Over recent
years Saudi Arabia has sought to apply cutting edge technology in order to
develop its newly discovered oil fields and maintain its production levels. But
in practice, despite the large number of oil fields, such challenges as
production falloff and large quantities of oil water are threatening the
country’s future crude oil production.
Currently,
rarely can a Saudi oil field be found to have been exposed to vertical
drilling. Furthermore, oil fields that have been developed since the 2000s onward,
have managed only to make up for part of production falloff in aging oil fields
to relieve pressure on such fields.
Oil
production hike by Saudi Arabia for politically motivated reasons under
different circumstances has seriously harmed oil output in this country,
causing a slump in oil production rate while increasing oil water. Therefore,
any future attempt by Saudi Arabia to enhance output would be costly for
Riyadh, which would even inflict more harm on its petroleum industry. Saudi
Arabia has only 200,000 b/d of extra capacity.
**Influencing
Prices
Saudi Arabia
is also facing restrictions when it comes to dipping into its strategic oil
reserves to keep the market under control. It must be always kept in mind that
any increase or decrease in strategic petroleum reserves would significantly
change the price of this product. As soon as there is talk of supply of
strategic oil reserves on the market, prices go into fluctuation. In other
words, the psychological impacts of the supply of such reserves on the market
are more significant than its real impacts. The higher the level of strategic
oil reserves the lower oil prices will be.
Therefore, once the volume of
strategic oil reserves declines, oil prices would go up. It means that in
countries like Saudi Arabia, where strategic oil reserves largely contribute to
energy pricing, any decline in the strategic reserves would give rise to a
negative atmosphere which would finally boost prices. Releasing the strategic
reserves into the market may boost oil supply; however, the impact of rainy day
reserves may be negative and drive prices up significantly. Therefore, tapping
strategic oil reserves to supply more is intertwined with its special
complications and therefore these reserves may not be simply used for
regulating oil markets.
Aside from
the aforesaid challenges, even if the idea of increased output works properly
and oil prices decline Saudi Arabia would then face a big challenge because it
would see its petrodollars, which make up more than 70% of its economy, fall to
very low levels. That would definitely threaten attempts by Crown Prince
Mohammad bin Salman who has embarked on reforms to boost his popularity prior
to ascension to the throne.
Therefore,
the Saudi regime is not much willing to see oil prices fall in the status quo.
In the meantime, another important point is that any increase in oil production
and exports by Saudi Arabia would be in contradiction with agreements reached
within the Organization of the Petroleum Exporting Countries (OPEC).
Saudi Arabia
was among leading OPEC members to bring up the idea of oil freeze in a bid to
help boost prices following the 2014 crash. Therefore, any attempt by Saudi
Arabia to release oil from its strategic reserves would draw negative reaction
from fellow OPEC members and even non-OPEC countries participating in the
"Declaration of Cooperation" in favor of prices.
Saudi Arabia
is facing a sensitive choice; either it will cooperate with fellow OPEC members
and non-OPEC producers or it will join US unilateral sanctions on Iran. In the
latter case, oil production by Riyadh will face tough restrictions.
Courtesy of
Iran Petroleum
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