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Down Oil Market Looms Over Saudi Leadership Change

Jan. 23, 2015
After an exceptional decade that saw it build up production capacity and huge financial reserves, Saudi Arabia is facing a major challenge from new market players.

RIYADH - King Abdullah's death could not have come at a worse time for Saudi Arabia's vital oil sector as the absolute monarchy seeks to reassert its leadership in a fast-changing industry.

After an exceptional decade that saw it build up production capacity and huge financial reserves, Saudi Arabia is facing a major challenge from new market players -- in particular North American shale oil producers.

The Gulf powerhouse now finds itself locked in a battle for market share against unconventional producers. It also faces challenges within the Organization of Petroleum Exporting Countries itself.

But experts expect Riyadh to fight fiercely to remain dominant.

Oil Minister Ali al-Naimi -- in the post for 20 years -- has strongly defended Riyadh's actions as legitimate and vowed not to cut output even if prices plummet to $20 a barrel.

"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," he told the industry weekly Middle East Economic Survey (MEES) in December.

Few people expect Riyadh's energy policy to change.

"I see a lot of continuity here," Frederic Wehrey, a senior associate at the Carnegie Endowment for International Peace's Middle East Program, told AFP.

"The oil policy is set by a cadre of technocrats and I don't see the next monarch as significantly altering this."

However, Saudi policy, OPEC's stance and fundamental market changes all make the future highly unpredictable.

"Things could need one year, two years or three. We don't know what will happen in the future. What is certain, however, is that high-efficiency producers will rule the market in the future," Naimi said in December.

Saudi Arabia 'Feels Threatened'

Between 2005 and last year, the United States reduced its net crude imports from 12.5 million bpd to around five million bpd, mainly because of soaring production from shale oil and gas.

It cut imports from the Middle East, Africa and Latin America, and bought more Canadian oil.

"No doubt the Saudi oil establishment feels somewhat threatened by the fact that the United States is producing over eight million bpd (on average) and limiting its net imports," Seznec told AFP.

U.S. production "has created a shift in oil trade flows", Bassam Fattouh, director of the independent Oxford Institute for Energy Studies, told the Arab Energy Conference in Abu Dhabi in December.

After losing much U.S. business, African and Latin American exporters are now looking eastward, Fattouh said.

With weak demand in China, now the world's top net crude importer, competition has become tough for Saudi Arabia which exports two-thirds of its oil to Asia.

Business is also threatened by potential output increases of some three million barrels per day if Libya, Iran and Iraq manage to restore or boost production.

Saudi economist Abdullah al-Kuwaiz said Riyadh had actively sought to diversify an economy in which the public sector still dominates.

But he said: "Riyadh still needs to do a lot to rationalize current expenditure, especially wages and salaries which account for 50 percent of spending."

Tycoon Prince Alwaleed bin Talal has also criticized Saudi reliance on oil income, advising prudent investment measures after Riyadh projected the largest deficit ever of $39 billion in the 2015 budget.

Copyright Agence France-Presse, 2015

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