The world’s largest oil producer, Saudi Arabia’s Aramco, has announced that it will, together with Kuwait, restart pumping oil from the fields in Khurais, contrary to earlier speculations that the company would hold back such plans in the face of the prevailing market glut.
When the expansion is complete, the company will be able to generate as much as 1.5 million additional barrels per day by 2018. This will be a 12.5 percent increase on Saudi Aramco’s total pumping capacity, which currently stands at 12 million bpd.
It was thought that the company would withhold such plans as the market is suffering from a glut in supply. Since 2015, prices have tremendously fallen, pushing some high cost producers out of the market and leaving the rest struggling to stay afloat.
While the market has slightly improved since the middle of February, there is still high uncertainty about the coming months, with the Short-Term Energy Outlook predicting that oil will sell at between $40 and $60 per barrel for the next two years.
Saudi Move Surprises Analysts
On January, the Deputy Crown Prince Mohammed bin Salman announced a proposal to sell some of Aramco’s assets sparking speculation that the company had already started trimming down its operations. During the same period, OPEC members also agreed to freeze oil production in order to stop the market glut and raise prices.
However, Saudi Arabia’s petroleum minister Ali Ibrahim al-Naimi said during an energy conference in February that there was no possibility of the country reducing its oil output. The recent announcements that Aramco will be continuing with expansions is a sign that the Saudi government intends to keep its word.
Low Oil Prices Squeezing the Saudis’ Budget
Despite the lack of reporting on the topic, Saudi Arabia is one of the governments that have been hit hardest by the falling oil prices, causing a budget deficit of up to $100 billion in 2015. The recent days have also seen gasoline prices rise in the country.
The current economic situation has been further exacerbated by huge military expenditures that Gulf Cooperation Council (GCC), an association of Saudi Arabia and five other neighboring states, are pumping into Syria and Yemen.
The education sector was among the first to be affected with a 12% budget cut. Moreover, students who wish to study abroad on government scholarship will have to try harder to secure positions in the top 100 universities or get admitted into any one of the top fifty priority courses recognized by the King Abdullah Scholarship Program. The plan has been supporting 60,000 students, most of who study in American universities.
Also, for the first time, the GCC announced that their citizens would start paying VAT taxes by the end of 2019. In nations where the population has enjoyed low costs of living, taxation is likely to bring a storm into the political environment if it is not implemented cautiously. Fortunately, major food items, education, healthcare, and social services will not be affected by the tax.
Optimistic News for Oil and the Saudis
Despite these concerns, there is still hope for the Saudi economy. The country has the largest confirmed crude oil reserves totaling 260 billion barrels and trillions of cubic feet of gas. With the ten year plan to double output, a rise in crude oil to just $50 per barrel will be a big boom to the economy.
There was also worry that US inventories would fill up this year, but citizens are consuming more fuel than they did during the same period in 2015, and this means America will need more supplies.
However, the US oil demand is characterized by irregularities whose advantage can only be best exploited by a constant producer. It will be difficult for domestic shale oil companies – many of which have already closed down or reduced operations – to respond promptly to the on/off demand spikes.
Although Iran intends to pump more oil into the market soon, its production capacity might not grow enough to change the Saudi market share.
In addition, Asian countries seem to have gone on a consumption spree with a bias towards Gulf States. China took in a lot of oil inventories last year from both Saudi Arabia and Oman. Also, for the first time since 1980, North Korea bought the largest amount of oil products from the Middle East in 2015.
The oil glut also seems to have muted the earlier global preoccupation with renewal energy. Demand for solar power has decelerated in 2016 and is expected to fall even further in the coming months.
The above factors might cause more market open up for oil in future. With this expansion, Saudi Arabia might just have the last laugh.