Will Saudi Arabia continue to maintain its role as swing producer for oil markets in the coming decade?
A new report by oil economist Tony Mackay, founder of Mackay Consultants Ltd., Inverness, Scotland, offers compelling evidence that the kingdom will not relinquish that role in the coming decade.
Mackay's report focused on prospects for the Middle East oil and gas industry for 2003-12. He concludes that most countries in the region will have to limit oil production in order to avoid a collapse in world oil prices. He also contends that growth in production from Iraq—and probably Iran as well—will have to come at the expense of output in Saudi Arabia, Kuwait, and the UAE. And he thinks that will be OK with them. Mackay forecasts that overall Middle East oil production will increase by 21.5% from 2003 levels to reach 25.5 million b/d in 2012.
"Forecasts made by individual countries add up to much higher production levels, but we do not believe that they can be achieved without causing a massive fall in oil prices, which would not be in the interests of the Middle East producers," Mackay said. "We therefore believe that some of the countries, notably Saudi Arabia, the UAE, and Kuwait, will agree to limit their production growth."
Market share
Being the perennial swing producer hasn't always meant Saudi Arabia sacrificing market share in efforts to prop up oil prices.
Mackay notes that the kingdom's output was fairly stable during 1992-98, averaging 9.2 million b/d. During that time, Saudi Arabia's share of output by the Organization of Petroleum Exporting Countries did in fact fall, from 34.9% in 1992 to a low of 29.4% in 1999. But the kingdom's market share rebounded to 29.9% in 2000, 29.8% in 2001, and 30.6% in 2002. Those were the same 3 years that oil prices were at their highest during 1992-2002. They were also the same 3 years that Middle East oil revenues, in current values, were at their highest during the period. And these years correspond with the implementation of OPEC's $22-28/bbl target price for a basket of OPEC crudes.
Revenue growth
Of course, the growth in revenues for Middle East oil exporters is a direct result of the successful price-band strategy.
After oil prices collapsed in 1998, Middle East oil revenues plummeted by $42 billion, or 29.7%. With the implementation of the price band, Middle East oil revenues rocketed up a cumulative 98% during 1999-2000. These revenues slipped a bit in 2001-02, but they were still almost double the 1992 levels. And 2003 is likely to improve on the recent levels.
Looking out the next 10 years, Mackay sees world oil consumption growing 1.5%/year even as it loses more market share to competing fuels, particularly natural gas. Oil production worldwide is poised to climb to 85.8 million b/d from 73.9 million b/d during 2002-12.
Mackay contends that while Russian oil output also will rise markedly in the period, to 10 million b/d by 2012, growth in its region (Europe) will lag other regions such as Africa and South America in terms of production growth as the North Sea decline continues. Consequently, Middle East producers will be able to increase oil output by 2%/year, a total gain of about 4.6 million b/d, by 2012.
Saudi Arabia—and to a lesser extent Kuwait and the UAE—must accommodate sharp production growth in Iraq and Iran in this scenario. The Saudi market share of Middle East output will drop by 4.6% by 2012.
But the kingdom nevertheless will see an overall increase of about 8.4% in oil output to 2012, according to Mackay's forecast. If, as seems likely, a Saudi-led OPEC will continue its defense of prices, then the Saudis will have a smaller piece of the pie, but the pie will get bigger.
In addition, Saudi Arabia will participate in the soaring growth of natural gas production in the Middle East. New revenues from sales of gas and of gas-fed petrochemicals production will take some of the sting out of losing oil market share. In such a scenario, oil production growth plus price defense plus growing nonoil revenue sources all add up to the Saudis avoiding a repeat of the production war that collapsed oil prices in 1986. Remember, it wasn't just the loss of market share that led the Saudis to start that production war; it was the concomitant loss of petrodollars to a level that threatened its survival.
(Online Nov. 15, 2003; author's e-mail: [email protected])
