2023-07-02 22:00:00
[ 沙特在国际石油市场上是一个“经济人”，即寻求本国经济利益最大化，其减产也是为了支持国内耗资巨大的改造计划。 ]
On June 4, Saudi Arabia said it would cut oil production by 1 million barrels per day in July. Production cuts may be extended if needed. The announcement came as OPEC+ agreed at a contentious meeting in Vienna to extend current production levels until the end of 2024.
The Saudi move comes exactly two months after the last production cut. On April 2, Saudi Arabia announced that it would join forces with Iraq, the United Arab Emirates, Kuwait and several other oil-producing countries to voluntarily cut production by 1.1 million barrels per day starting in May.
Cut production, reduce supply, supply decreases, oil prices rise, this is economic common sense. Why does Saudi Arabia insist on raising oil prices?
Oil production cuts help Saudi Arabia reshape economic model
International benchmark Brent crude has been on a downward trend since late 2022, nearing $70 a barrel in March, amid fears of a global recession. Oil prices rose to $84.93 a barrel after Saudi Arabia announced oil production cuts. This shows that Saudi Arabia is doing whatever it takes to keep oil prices at levels that benefit it.
Saudi Arabia is an “economic man” in the international oil market, that is, it seeks to maximize its own economic interests, and its production reduction is also to support the domestic costly transformation plan.
In 2022, Saudi Arabia’s GDP will achieve a growth rate of 8.7%, which is the highest growth rate among the G20 countries. At current prices, Saudi Arabia’s GDP exceeds $1 trillion in 2022. Such a bright performance benefited from a 32.7% surge in crude oil and natural gas production. But Saudi Arabia is not satisfied with the contribution of the oil industry. Crown Prince Salman of Saudi Arabia is implementing an ambitious plan to use Saudi Arabia’s huge oil revenue to transform the domestic economy, reshape the natural landscape of Saudi Arabia and subvert conservative culture.
In 2016, Crown Prince Salman personally created this economic reform plan called “Outlook 2030”. The plan aims to create a diversified, private-sector-oriented economic model, increase non-oil revenues, and emphasize e-government and sustainable development. The plan envisages the development of a new city in northwestern Saudi Arabia, aiming to attract investment in renewable energy, biotechnology, robotics, advanced manufacturing and tourism, including US$20 billion in artificial intelligence and US$30 billion in renewable energy. Dollar.
In the field of new energy, Saudi Arabia has two projects. The first is a solar power plant that will be put into operation in April 2021. The plant consists of 1.2 million solar panels. The second is wind power, a wind farm consisting of 99 wind turbines, which is expected to set a world record for the lowest cost of wind power generation. There is also a jaw-dropping Big Mac project, a Red Sea tourist resort with an area equivalent to Belgium, with multiple Maldives-style hotels on the water in the resort, and a future high-rise building built in the desert at a cost of US$500 billion. A tech city 33 times the size of New York City.
Saudi Arabia’s grand vision requires a lot of money. When the oil price is $100 a barrel in 2022, Saudi Arabia has accelerated its action plan. These initiatives mainly rely on the $650 billion sovereign wealth fund in charge of Crown Prince Salman. In October 2022, before Saudi Arabia announced its decision to cut production, its government officials stated that the price of Brent crude oil needs to be at US$90-100 per barrel in order to maintain the budget balance of the Saudi government, which is higher than the US$75-80 originally determined by Saudi Arabia. Oil price target range. Crown Prince Salman expressed concern over an economic analysis by the Saudi energy minister. Oil prices could fall below $50 a barrel, jeopardizing Crown Prince Salman’s massive spending plans, the report said.
“Outlook 2030” reflects Crown Prince Salman’s sense of urgency, and the Saudi economy’s heavy dependence on oil should change. The emergence of new technologies such as new energy, shale oil, and artificial intelligence has given Saudi leaders a sense of crisis. Saudi Arabia’s sustainable development will be problematic if the country’s economic model is not changed. However, whether Saudi Arabia’s goal of reducing oil production and increasing revenue can be realized does not depend on Saudi Arabia’s unilateral will, but depends on the supply and demand relationship in the global oil market. Saudi Arabia is not the only supplier of oil in the world and cannot monopolize oil. Its crude oil production accounts for 10% of the world, which is not enough to generate market power. Therefore, the result of reducing production and raising oil prices will not be satisfactory.
Market forces thwart Saudi efforts
First, a surge in supply from several smaller producers. Oil production in Iran, Guyana, Norway, Kazakhstan, Brazil and Nigeria has been increasing since the fall of 2022, boosting global oil supply. Nigeria’s output, in particular, has rebounded. Armed guards have been escorting barges along the region’s vast rivers and waterways in the Niger Delta, which is rich in oil.
“There’s 100,000 bpd coming out here, 200,000 bpd coming out there,” said Martijn Rats, chief commodity strategist at Morgan Stanley. A sense of tension.”
Second, the market is worried about the weak economy in the United States and Europe, and the oil market is short speculative. Bank failures and worries about the financial sector led to a sharp sell-off in crude oil in March, prompting Saudi Arabia and other countries to voluntarily cut production. A similar pattern has emerged in recent weeks, with short speculative positions rising sharply as markets remain concerned about economic weakness in the U.S. and Europe. Brent crude oil prices fell below $73 a barrel in the first few days of late May and early June, and the price decline in recent weeks has erased all the gains since OPEC+ voluntary production cuts in early April.
In April, Saudi Arabia joined forces with Russia, Iraq, the United Arab Emirates and other countries to further cut production. However, the international oil price is determined by the relationship between supply and demand in the market. The global benchmark Brent crude oil price was around US$85 per barrel around April 10, not higher than in early March, and lower than the high of more than US$125 shortly after the Russia-Ukraine conflict. .
Entering June, oil prices were still about 18% lower than when OPEC+ first cut production to disrupt the market in October last year. Saudi officials have acknowledged that the current increase in oil prices has not been as high as expected by Crown Prince Salman. The cuts will bring Saudi output down to 9 million barrels per day, the lowest level since June 2021, a level rarely seen in the past 10 years, suggesting the kingdom hopes to prop up prices by sacrificing market share. But doing so could be costly, as higher oil prices so far have not been able to make up for lost revenue from lower production.
Saudi Arabia is in the early stages of an economic transformation plan, and its government budget slipped into deficit in the first quarter of 2023 despite an increase in non-oil revenues. Saudi Arabia’s fiscal breakeven price in 2023 is $81 a barrel, according to the International Monetary Fund.
Third, Russia is unwilling to fulfill its commitment to cut production. Russia pledged to cut production by 500,000 barrels per day starting in March, but failed to cut production significantly by the end of May. Instead, Russia has been maximizing oil output, with the aim of increasing exports as much as possible to offset falling oil revenues due to EU embargoes and price caps. Russia’s low oil sales are conducive to increasing the demand for Russian oil.
Russia’s non-compliance with OPEC+ goals is nothing new. Since December 2016, when a declaration of cooperation to form the OPEC+ group was signed, Russia has regularly exceeded its targets. Saudi Arabia, the United Arab Emirates and other members of OPEC+ often talk about the success of OPEC+ depending on cooperation with Russia, but their patience is wearing thin. The problem with OPEC+ is this: In the absence of better compliance from Russia, further cuts will only hurt the incentives of other producers to cut production. And Russia has shifted its oil sales focus to India and China, which has also expanded its market share in these countries, putting the Gulf oil-producing countries at a disadvantage.
In 2020, when the new crown epidemic weakened the global economy and oil prices, Russia refused to cooperate with Saudi Arabia to significantly reduce production in order to stabilize prices. In response, Saudi Arabia flooded the market with oil, causing crude prices to plummet and severely hurting Rosneft. After Saudi Arabia decided to reduce oil exports by 1 million barrels per day in early June, Russia did not follow through with its commitment to cut production. Russian President Vladimir Putin said at the time that oil prices were approaching “economically reasonable” levels, suggesting that Russia’s production policy might not change immediately.
U.S. influence on Saudi oil policy wanes
For a long time, Saudi Arabia’s oil export policy will take into account the interests of the United States. However, the relationship between the Biden administration and Crown Prince Salman of Saudi Arabia has not been handled well. After the conflict between Russia and Ukraine, Saudi Arabia rejected Biden’s request to increase oil production. OPEC+ decided to cut production sharply from November last year, and then international oil prices hit the largest weekly increase since mid-March 2022, causing complaints from European and American countries that were already plagued by high inflation.
Biden is extremely dissatisfied with the Saudi-led oil production cuts, threatening that Saudi Arabia will “bear the consequences.” White House aides also announced that the Biden administration will reassess its relationship with Saudi Arabia. But it turns out that Biden overestimated the influence of the United States on Saudi Arabia. Faced with Saudi Arabia’s production reduction policy, the Biden administration is helpless. Judging from the existing technology, new energy cannot replace the role of oil in the military, and oil will always be a strategic material.
Farouk Soussa, an economist at Goldman Sachs who covers the Middle East and North Africa, said Saudi Arabia was less willing than in the past to put its own economic interests on the back burner in favor of U.S. economic interests. However, Crown Prince Salman will not turn against the United States. The reality that Saudi Arabia relies on the United States for advanced weapons will not change, and military power is a solid foundation for Saudi Arabia to maintain its influence in the Middle East.
In short, Saudi Arabia’s oil production cuts reflect Crown Prince Salman’s willingness to increase fiscal revenue, but personal wishes cannot manipulate objective laws, and oil prices must ultimately be determined by the market.
(The author is a professor of economics at the School of Business, Tianhua College, Shanghai Normal University)
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