Saudi Arabia’s decision to increase oil output to its highest level in two years could cast a shadow over the Kingdom’s strategic drive to diversify its economy, analysts have warned.
Although hydrocarbons will remain Saudi Arabia’s “bread and butter”, the proceeds of the boom “should be reinvested in sectors that are building resources for the country, rather than depleting its natural resources,” said Tawfiq Al-Wan, senior analyst at BMG Financial Advisors in Jeddah.
The announcement last month of a boost in output by about 300,000 barrels a day came after a plea last month by US president George W Bush to King Abdullah of Saudi Arabia in Riyadh. But analysts say the country would have little to gain from a rapid further opening of the taps from the best quality and most accessible reserves.
“Oil will remain the dominant energy source,” said Al-Wan. But “while taking advantage of the high price of oil, I think we should reinvest in a sustainable and diversified line of investment.”
In an interview with Emerging Markets at the end of last year, Saudi finance minister Ibrahim Al Assaf noted that Saudi Arabia, while having “enjoyed substantial domestic and external surpluses over the last few years”, continues to use “these surpluses prudently to enhance the fiscal position, including retiring a good part of the public debt and accumulate foreign assets. “We feel comfortable with our achievement in this connection,” he said.
Nevertheless, Saudi Arabia insists it is pumping all the oil that American refining customers are asking for, stepping in this month to boost supplies to the US from 1.4 million b/d to 1.7 million, to replace a cutback in supplies from Mexico and Venezuela.
In contrast to the Kingdom’s past role as ‘swing producer’ – raising or lowering demand to fit market trends – Saudi Arabia in recent years has adopted a more balanced approach, gradually increasing output capacity, based on a long-term analysis of world demand and domestic needs.
Al Assaf noted that Saudi Arabia in its role as “the major oil producing and exporting country, has been striving to ensure stability of the market by embarking on a number of mega projects to expand both upstream and downstream capacities.”
He said that the new projects should boost oil productive capacity to “12.5 million barrels per day by 2009”. The minister added that the surge in prices – which recently saw the oil price push beyond $135 per barrel – was “a response to a significant surge in global demand for oil”.
But he said that in order to countenance the huge costs involved in sustaining increased capacity, oil producers need assurances on oil demand from consumers, including the US.
The importance of demand security “cannot be overstated. Indeed, sustaining the large capacity entails significant costs, and it is imperative that Saudi Arabia and other oil producing countries be assured of future demand conditions,” he said.
After months of uncertainty, ConocoPhillips and Total confirmed recently they will build deep conversion refineries in a joint venture with Saudi Aramco.