HARDLY a few years back, sometime in 2008 to be exact, Saudi Oil Minister Ali Al-Naimi and his team singled out speculation, and not fundamentals, as the prime culprit for the wild swings of the crude markets. Not everyone, especially in the Western world, took that seriously - initially. Some were definitely skeptical - to say the least. Yet with the passage of time, slowly and gradually, the message began seeping through. Many erstwhile skeptics, including the IEA, began underlining and appreciating the role speculative money played in the energy markets. Most pundits now accept speculation as impacting the crude markets - and rather heavily. Times have changed. Prices have sunk and all sort of conjecturing is in air. A battle royal to protect market share is on. Protecting their respective market share has emerged as a central concern of the producers. And meanwhile, conspiracy theories, from targeting shale output to Russia and even Iran have been making rounds for the last few months - ever since OPEC - apparently at the insistence of Naimi and his allies - opted not to cut output. The message from Riyadh was obvious. If markets needed to be stabilized, every one, both OPEC and non-OPEC producers, needed to partake in any such adventure. And when non-OPEC crude producers declined to share the pain of cutting output, Saudi Arabia insisted on maintaining output so as not to cede their markets share to non-OPEC players. Still the decision not to cut output was not irrational. There was apparently a deep thinking process behind the decision not to cede markets share. Efficient producers should not give in to inefficient producers, Naimi insists. Way back in December, while talking to MEES, Naimi underlined, in rather plain words, that efficient crude producers should not be pushed or expected to cede market share to inefficient producers. He pushed forward the view then, that to be an efficient crude producer, quality of fields, prudent investments in the sector and the financial reserves accumulated over the last few years, count significantly. Obviously he had Russia, having refused to take part in any output cut regimen on technical grounds, in mind. “The problem with old fields around the world is that they need continuous investment in new wells, and they cannot shut in old wells, because if they do, they will not come back up. So they are wary in that respect, particularly in West Siberia, where they have been producing for a long time and the wells there are declining. And it was with this view that Naimi pointed it out that it's unfair for the world to expect OPEC to take the cuts so that inefficient producers can be spared. Riyadh is now taking the efficiency mantra to center stage. It wants to clarify, and once for all, that there were no geopolitical ambitions behind its decision not to cut output …that all crude sources, including the shale, are of great importance in bringing stability to the markets. Naimi is continuing to stress on collaboration with non-OPEC producers too. “Now the situation is different (from past). We need every major producer to cooperate,” he said in Berlin last week. And then he went on to add: “It makes absolutely no sense for the most efficient producers to be the ones to cut production when we are only 30 percent of the producers.” With the recent price drop, OPEC and Saudi Arabia have yet again been maliciously – and unfairly – criticized for what is, in reality, a market reaction. Some speak of OPEC's “war on shale”, others claim “OPEC is dead.” Theories abound. They are all wrong, Naimi asserted. Referring to the Saudi energy policy, he underlined that Saudi Arabia's quest for market share is simply an effort to satisfy rising customer demand. Seeking well-balanced markets remains the central pillar of Saudi Arabia's oil policy, he added in plain words. “We have invested vast sums to maintain spare production capacity, and consistently (continue to) invest for the long-term. We believe our policies have contributed to market stability and our partners across the world recognize this. When significant supply disruptions have occurred, we have risen to the challenge and the Kingdom has repeatedly made additional volumes available. This has helped blunt some of the negative impacts on the global economy. Saudi Arabia takes this role seriously and remains committed to being a reliable supplier to our customers around the world.” Then he clarified “we have a long-term view. We try to avoid knee-jerk reactions to short-term market movements. Over the past eight months, though, with the market in surplus, it is Saudi Arabia that is called upon to make swift and dramatic cuts in production.” And then referring to the experiment in 1986, he reminded, ‘this policy was tried in the 1980s and it was not a success. We will not make the same mistake again. Today, it is not the role of Saudi Arabia, or certain other OPEC nations, to subsidize higher-cost producers by ceding market share. Explaining the rationale behind the issue of efficient producers as against the inefficient, Naimi emphasized: “Of course, during periods when supply growth outpaces demand, the lowest-cost producers will inevitably have an edge over higher cost marginal producers. Saudi Arabia, blessed with a massive hydrocarbon resource base and some of the world's largest conventional oilfields, enjoys very low production costs. And we are more efficient than other producers. It is an advantage which we will use, as any producer would, to help supply dependent global customers.” Also discarding the theory that Saudi Arabia was endeavoring to strangulate US shale output, Naimi made clear: “This new oil supply growth – much of it coming from the US – is a welcome development for world oil markets and the global economy over the past several years. These new supplies, along with Saudi Arabia's own efforts, have helped offset outages from other oil producing countries. Without them, a still vulnerable global economy could have faced much higher energy prices. Saudi Arabia has consistently welcomed new unconventional supplies, including shale. As I said, Saudi Arabia has a long-term view. And in the long term, additional demand will need to be met by all sources of energy, be they fossil fuel or renewables.” Naimi has a point. Inefficient producers should not be promoted at the expense of the efficient ones, free market economics dictate.
