Saudi Arabia is the world's second-largest producer of crude oil. So the news that the country's King Abdullah
has died certainly has the potential to shake up global oil markets.
IN THE SHORT TERM, SAUDI OIL POLICY IS UNLIKELY TO CHANGE MUCH
Already, there are signs of jitters: After Abdullah's death was announced on state television, the price of West Texas Intermediate crude
jumped 2 percent, to $47 per barrel, in early trading.
One key question on everyone's mind is whether Saudi Arabia could alter its policy of keeping oil output high even as the rest of the world is oversupplied with crude. This controversial stance
has helped drive global oil prices downover the last few months. But those low prices are also squeezing Saudi Arabia's budget — and the policy has attracted criticism from some members of the royal family.
In the short term, analysts say, it's unlikely we'll see a big shift in oil policy following King Abdullah's death. The newly announced king, Salman bin Abdulaziz,
has explicitly backed the country's current stance.
Even so, this is a story worth keeping an eye on, particularly since Salman
is already 79 years old, and the next in line, Crown Prince Muqrin, is 69. And it's wildly unclear how further succession will play out.
"In my view, we're not going to see a big change in Saudi oil policy [with King Salman]," said Bob McNally, a former White House official and now head of Rapidan Group, a Washington-based consultancy. "But I expect there will be some uncertainty and commotion in terms of who will come next."
Saudi Arabia's recent policies have helped keep oil prices low
Spot price of Brent crude as of January 5, 2015 (Joss Fong/Vox)
To understand what's going on, we have to go back to November of last year. At the time, global oil prices
were already falling due to soaring production in the United States and Canada, coupled with sagging demand in places like Europe and Asia. Basically, the world
had far more oil than it needed, and prices were plummeting as a result.
WHEN SAUDI ARABIA REFUSED TO CUT BACK ON OUTPUT, OIL PRICES SLID EVEN FURTHER
That brought us to OPEC's big meeting onNovember 27. At the time, many observers wondered whether the cartel — which pumps out 40 percent of the world's oil — might lower its production in order to prop up prices. After all, countries like Iran, Iraq, and Venezuela need high oil prices to balance their budgets.
But Saudi Arabia, OPEC's largest producer,
refused to cut back. Saudi officials didn't want to surrender market share. Instead, they were hoping that the decline in crude prices would throttle high-cost oil producers in the US and Canada. (It costs far more to extract oil from shale formations in Texas and North Dakota than it does to pump crude from Saudi Arabia's oil fields.)
Once Saudi Arabia announced that they would maintain output, global prices crashed even further — eventually tumbling down to their current level of below $50 per barrel. That's the reason why gasoline in the United States
is now the cheapest it's been since 2009.
In the months that followed, Saudi Arabia's officials have reiterated support for this policy. In December, the country's oil minister, Ali al-Naimi,
said he didn't care if prices crashed to $20 or $40 per barrel, he wasn't going to budge from his position. "It is not in the interest of OPEC producers to cut their production, whatever the price is," he said.
But Naimi's stance
has been controversial among some members of the Saudi royal family. After all, the country needs oil prices at around $80 per barrel or so to balance its budget. Citigroup recently predicted that the Saudis
may soon have to cut back on government spending — spending that had been put in place to tamp down on unrest after the Arab Spring. And, while the kingdom has built up $750 billion in foreign reserves to finance any deficits for now, the whole situation makes some Saudis nervous.
"The big fear, or let's say the big disaster, is that the ministry will continue withdrawing from the state financial reserves until they are totally depleted as was the case long time ago, when we were forced to borrow from abroad,"
wrote Prince Al Waleed bin Talal, a member of the royal family, in a letter in January. Likewise, one of Abdullah's (many) sons, an assistant minister for petroleum affairs,
was reportedly not a fan of the decision to keep output high.
But through it all, King Abdullah stood behind Naimi — and his policy to maintain Saudi output. Which raises the question: What happens now that Abdullah is gone?
Why the Saudis may keep their oil policies in place
Saudi Arabia's new king, Salman Bin Abdulaziz Al Saud, pictured here in September 1, 2014 meeting with French president Francois Hollande. (Andalou Agency/Getty Images)
McNally, for his part, thinks it's unlikely that Saudi Arabia will shift its oil stance much — at least in the short term.
The Saudis quickly announced that the new king will be Abdullah's brother Salman bin Abdulaziz — and he appears to support the country's current policy. Back on January 6, Salman delivered the nation's "state-of-the-kingdom" address
in which he said that the country would display a "firm will" even as oil prices tumbled. That was widely seen as a clear endorsement of Naimi's stance.
BACK ON JAN. 6, SALMAN PUBLICLY ENDORSED THE CURRENT OIL STANCE
"This is now state policy," McNally said. "Naimi wouldn't be freelancing on his own."
One reason that the Saudis might continue to maintain output — even though low prices are hurting their budget — is that they don't really have any other great options. If Saudi Arabia were to cut back on production, prices might stay low anyway. In that case, all that would happen is that the Saudis would lose market share to competitors like Iran or Iraq. (Indeed, this
is basically what happened when Saudi Arabia cut back on production in the early 1980s in a failed attempt to stop prices from crashing.)
That all said, any change in leadership always creates some uncertainty — especially since the new king Salman is already 79 and
reportedly in poor health himself. The next in line, Crown Prince Muqrin, is 69. And
no one really knows how the line of succession will actually play out in the future. So it's entirely possible that further unexpected changes could be on the way.
Further reading
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