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Meet the New King, Same as the Old King: Price-Crushing Oil Policy Stands


By Maher Chmaytelli for Bloomberg –

King Salman, Saudi Arabia’s new ruler, will keep Oil Minister Ali Al-Naimi in his post, bolstering expectations that he will continue the policy of maintaining crude output to preserve market share even as prices have plunged.

Salman, 79, issued a royal decree to retain current ministers, according to the official Saudi Press Agency. Al-Naimi led OPEC’s Nov. 27 decision to maintain its crude production even as shale supplies spurred U.S. output to the highest in three decades. Salman said on Saudi national television that he will maintain the policies of his predecessor.

With production of 9.5 million barrels a day and exports of 7 million, Saudi Arabia accounts for more than a 10th of global supply and a fifth of crude sold internationally. The country’s refusal to surrender market share to rising U.S. output has contributed to the worst slump in prices since the global credit crisis of 2008.

Succession in the Persian Gulf

“The Saudi leadership has already taken the tough decision to live with lower oil prices,” Florence Eid-Oakden, chief economist at London-based consultants Arabia Monitor, said by phone. “Naimi is well established, he is respected and there shouldn’t be a change as long as the current cabinet is in place.”

Brent Rally

Brent crude oil, the global benchmark, rose as much as 2.6 percent to $49.80 a barrel in London on Friday, before paring gains to $49.38 at 10:37 a.m. local time. West Texas Intermediate rallied as much as 3.1 percent.

The price increase following the death of King Abdullah will be temporary because it won’t alter the nation’s policies and U.S. oil output will continue rising, Fatih Birol, chief economist of the International Energy Agency, said in an television interview with BloombergHT in Davos Friday.

In signs of a smooth succession, Salman was named king and Prince Muqrin, 69, another half-brother, has been chosen as Crown Prince. Salman appointed Prince Mohammed bin Nayef, the country’s Interior Minister, as deputy crown prince and his son Mohammed bin Salman as defense minister, Saudi State Television reported today.

In his previous capacity as crown prince, King Salman read a speech on behalf of the late monarch on Jan. 6 that confirmed the continuity of the country’s oil policy in the face of market “tensions” caused by slow growth in the global economy.

“These tensions aren’t new to the oil market, and we’ve dealt with them in the past with a solid will, with wisdom and experience, and we will deal with the current developments in the oil markets in the same way,” he said.

Oil slumped 48 percent in 2014 as OPEC’s 12 members refused to cut output and yield market share in the face of rising U.S. production. West Texas Intermediate, the U.S. benchmark, fell on Jan. 5 to less than $50 a barrel for the first time since April 2009.

Decision Making

In theory, Saudi oil decisions are made by a Supreme Petroleum Council headed by the king and made up of senior members of the royal family, ministers and industry leaders.

In practice, decisions seem to have been left in Al-Naimi’s hands, said Simon Henderson in an October research note for the Washington Institute. “Although he is in his late seventies and said to be looking forward to retirement, Naimi retains a firm grip,” Henderson said.

Al-Naimi, who has driven decision-making since 1995, has said he’d like to devote more time to his other job, chairman of the science and technology university named after the late sovereign.

While no member of the ruling Al-Saud clan has ever served as oil minister, Prince Abdulaziz bin Salman, a son of the new king, is assistant oil minister and a regular participant in OPEC meetings.

Market Share

With oil revenue accounting for 46 percent of Saudi Arabia’s GDP, “it is possible that this policy could be relaxed in 2015 because it is very costly financially and is taking its toll on many Arab countries that Riyadh doesn’t wish to destabilize,” said Francis Perrin, the director of Paris-based energy consultants Stratener, in a Jan. 6 e-mail.

Al-Naimi, 80, led the Organization of Petroleum Exporting Countries to its Nov. 27 decision to keep production unchanged, ignoring pleas for a cut in the group’s output by Venezuela, Algeria and other members that depend on higher oil prices to balance their budgets.

“If I reduce, what happens to my market share? The price will go up, and the Russians, the Brazilians, U.S. shale oil producers will take my share,” Al-Naimi told the Middle East Economic Survey last month. “Whether it goes down to $20 a barrel, $40 a barrel, $50 a barrel, $60 a barrel, it is irrelevant.”

Saudi Production

Saudi crude production averaged about 9.7 million barrels a day last year, according to data compiled by Bloomberg.

The kingdom, with a population of 29 million, has $736.23 billion in reserve assets, or 6 percent of the world’s total, data compiled by Bloomberg show. The government forecast its budget deficit for this year will widen to 145 billion riyals ($39 billion) from 54 billion riyals in 2014.

The country will plug the deficit by borrowing and drawing on its financial reserves and will continue to spend on major projects including railroads, electricity, desalination and universities, the official Saudi Press Agency reported Dec. 25, citing Economy Minister Mohammad Al-Jasser.

The 2015 budget forecast revenue falling to 715 billion riyals from 1.046 trillion riyals in 2014, assuming an oil price of $80 a barrel, John Sfakianakis, who served as an adviser to the Saudi finance ministry, said Dec. 26.

“Major policies are not going to be changed without a clear steer from the throne, but beyond the rumors that often circulate there is no evidence to suggest those decisions cannot be made,” Richard Mallinson, a London-based geopolitical analyst with Energy Aspects, said by e-mail.

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