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Saudi Arabia continues to boost crude production

As Saudi Arabia boosts crude production to a record high, the country's leaders look to the future.

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The phrase “Saudi is going for it” ranks pretty high among those that people in the oil industry don’t want to hear right now. But it appears the kingdom really is hell bent on crushing opposition among oil producing nations.

In March the kingdom hit a record rate of production – 10.3 million barrels a day. It wasn’t alone – in the same month both Iraq and Libya boosted production in spite of the ongoing trouble in their countries. In fact there is now an additional two million barrels a day coming from OPEC now than in March 2014.

What we are seeing now is the natural conclusion of the decision taken back in November 2014 at OPEC’s meeting when the group announced no slowdown in output despite the tumultuous collapse of the oil price. This was the first time in years that OPEC decided not to take the hit and assume responsibility for rehabilitating the market by instigating production cut backs.

The man who held firm against those calls is the Saudi petroleum minister Ali al-Naimi. It was his strategy to keep pumping and force others to go out of business as prices dipped even further. In January we saw prices sink to below US$51 a barrel. Two weeks ago he said he would be prepared to “improve prices” but only if others outside OPEC joined the effort.

According to industry analysts, this is a two pronged play. OPEC is not only targeting US shale drillers – it is also prolonging the global demand for oil.

It has long been a concern that with high oil prices and climate change, emerging markets would look to renewable fuels and alternative energy. China in particular has been becoming less dependent on oil and more on natural gas. In a speech in Riyadh earlier this month Al-Naimi said he would stand against “.. those who are trying to reach international agreements to limit the rise of fossil fuel and that will damage the interests of oil producers in the long term.”

By dropping the price, OPEC not only hopes to knock smaller players out of the game but makes it easier for countries to use oil to grow. Indeed researchers at the Bank of America Merrill Lynch say at $60 – $70 a barrel peak demand gets pushed back by around five years. The knock on effect is that the renewable energy industry gets pushed back too which could very well suit recent deals struck between Saudi Arabia and Korea.

There’s no doubt al-Naimi is protecting his country’s fortune now and into the future but he doesn’t see oil as being the only way to do this. In 2013 he said, “Our ultimate aim is to diversify away from our overreliance on oil revenues.” That’s been a plan since 2006 when he set about building Saudi Aramco’s first university, which was done with a view to moving the country beyond oil.

Recent deals struck between Korea and Saudi Arabia suggest an intriguing shift may be on the horizon. Not only has the kingdom done a deal with Korea’s largest steelmaker that could see it develop its own car industry (thanks to its very large and cheap aluminium production capabilities); but during a nine day trip last month involving the Korean President Park Guen-hye 44 deals worth more than US$800m were signed between the two countries. They included making commitments in fields to cooperate in the development of nuclear energy. Both countries have agreed to find a way to build SMART units (system integrate modular advanced reactor) in Saudi at a cost of US£1bn. If that is a success they would work on marketing them to third countries.

Saudi’s nuclear programme is still in its infancy but 16 nuclear power reactors have been planned for development over the next 20 years in a bid to meet the growing energy demand and move away from reliance on depleting hydrocarbon reserves.

The financial investment required by Saudi Arabia to enter into these industries is huge, which would appear to explain why the kingdom is playing hard ball in the oil fields. Al-Naimi isn’t just looking to tomorrow’s fortune, he’s got his eye on the long game.