Saudi Arabia Will Continue To Cut Oil Output For Months And Years To Come

Source: Forbes

Saudi Arabia has kept its promise. It has cut oil output by 486,000 barrels a day, in line with the OPEC agreement the Kingdom pulled together last October, helping oil stabilize above $50 per barrel.

That’s music in the ears of American frackers, who have been bringing oil rigs back to life at a feverish rate—111 in the last two weeks alone; countering Saudi oil cuts, and keeping oil prices in the $50 to $60 range, for now. 

Still, Saudi Arabia’s output cuts are just the beginning of a trend that is expected to last for months and years to come, irrespective of what American frackers do.

There are good reasons for that.To begin with, the Kingdom has learned a lesson the hard way: it cannot end the American fracking revolution by engaging in a price war with American frackers -- which have demonstrated an exceptional ability to survive even at extremely low prices.

Moreover, Riyadh’s leaders do not want to antagonize the new Washington administration by declaring another war on American frackers.

Then, there’s Riyadh’s grand plan: the Aramco IPO -- sell shares of state-owned company Aramco to the public to finance its vision 2030, which will make the Saudi economy less dependent on oil.

The success of Aramco’s IPO, which promises to be the biggest in history, relies heavily on the state of the oil and equity markets at the time of the “road show”– the date for marketing of the IPO. The higher the oil prices, the easier it will be to sell Aramco to institutional investors at a high price.

But there’s another factor, more fundamental, which will cause output cuts to last beyond the IPO. The Kingdom may be running out of oil faster than previously thought. Its major oil fields have become mature, and new fields are hard to come by. 

The trouble is that it’s very hard to substantiate this factor, due to the secrecy that surrounds the Kingdom’s oil reserves.

“What we know about the Kingdom’s oil is pretty much what Saudi Aramco, the Petroleum Ministry, and the royal family want us to know,” writes Matthew R. Simmons in Twilight In The Desert: The Coming Saudi Oil Shock And The World Economy(New York: John Wiley& Sons (2005)-p.19. “The ‘known facts’ about Saudi Arabia’s oil, then, are few and simple. In 2004, ‘proven oil reserves’ totaled 259.4 billion barrels, plus another 2.5 billion barrels in the Saudi-Kuwait neutral zone. If these proven reserve numbers are real, it means that Saudi Arabia’s oil will last another 90 years at the current production barrels per day.”

Adding to the secrecy surrounding Saudi reserves is persistent inconsistency of oil production data published by different agency. “There is a persistent lack of close agreement among estimates made by Saudi Aramco, the International Agency, the U.S. EIA/DOE and BP’s annual Statistical Review of World Energy of the amount of Saudi Arabian oil produced each year from 1988 to 2004,” continues Matthew R. Simmons.“The variances between these sources highlight the uncertainty about the volume of oil that Saudi Arabia produces (p.88).”

While only time will tell how long Saudi Arabia has before running out of oil, Saudi output cuts will stabilize oil prices in the $50 to $60 range, provided that the world economy grows fast enough to absorb the added supply that will come from American frackers.