Financial Times runs a piece noting that oil from Saudi Arabia will continue to play an important role in the global economy despite enormous potential from shale oils now beginning to be exploited in North America and other parts of the world. The reason is that Saudi Arabia, which still holds and will continue to hold a substantial portion of the world’s oil supply, has served as a buffer and will continue to do so.

Saudi Arabia has shown its willingness to step in and increase its production when global political affairs end up with reduced production elsewhere. The Saudis, for example, increased production when Libya went off-line during its recent revolution. The Kingdom also increase its shipping to fill the void created by sanctions on Iranian oil. It has the reserves that allow it to do so, even if not perfectly.

The article also notes how Saudi Arabia sells oil on contract to end-users; it keeps its oil out of the spot market. This results in a moderating of prices and prevents speculators from gaming the market even more than they currently do.

Saudi Arabia still important to future oil market supplies
Ajay Makan

Until recently any discussion about new oil supplies began with Saudi Arabia. That is no longer the case.

In 2007 Ali Naimi, oil minister of the world’s largest oil exporter, said Saudi Arabia had identified projects to increase oil production capacity to 15m barrels a day. But in Washington this April Mr Naimi said production capacity would not increase beyond the current 12.5m b/d in the next 30 years.

The reversal stems in part from a dramatic moderation in oil demand growth since the financial crisis. But it also reflects an unexpected surge in supply from beyond its borders, particularly from the shale revolution in the US.

While Saudi Arabia has frozen production expansion plans, it is consuming more of its own oil. Domestic refining capacity is expected to rise from about 2.1m b/d to 3.3m b/d within a few years, as three new large facilities come on stream.

“There is a strong risk that Saudi Arabia will become a smaller crude exporter as a result of increased refining capacity and US shale,” says Michael Wittner, head of Americas commodities research at Société Générale.

And yet arguably Saudi Arabia is more important to future oil market supplies than ever. There are two reasons for this – the kingdom’s commitment to maintain spare capacity and the nature of its contracts with customers, which allows them to ask for more oil when the market is tight.

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