Dr. Daniel Fine, New Mexico Center for Energy Policy
There is instability in the leading oil producer within OPEC and the lowest cost producer in the World. Nothing like this has happened in Saudi Arabia since the middle of the last century.
It is only a matter of the short term before the price of world oil is affected. And its Implications will reach the Four Corners and New Mexico no matter what Congress or The White House does.
First, the instability begins from a dynastic change with an ailing and aging King and a young crown prince ousting his cousin as the successor to the throne as King of Saudi Arabia. This divides the rulers into two factions: the traditionalists or old guard (Ali Al-Naimi) against the modernists and a take-over generation. Second, the oil ministry and Saudi Aramco (the Government-owned and monopoly oil company) is now controlled by the take- over generation.
No doubt President Trump was influential in the recent diplomatic visit to the Kingdom. He gave support to the take-over faction with closer ties to the take-overs through Mohammed bin Salman, now the heir to the throne. Billions in American service company projects with Saudi Arabian petroleum expansion were announced. President Trump concluded with a strategy and tactic of eliminating radical Islam in Saudi Arabia and the Middle East. He said it must be attacked at the roots of the social and political order.
Qatar was next. It has been isolated and diminished by the take-over generation adding more resentment among the traditionalists in Saudi Arabia. While it is the largest producer and exporter of liquid natural gas in the world, it also produces as much as 80 percent of the oil output of the Permian Basin. The big picture is struggle between Iran and Saudi Arabia to dominate the region or Islamic Middle East.
It was the take-over generation that switched Saudi Arabia oil strategy from an anti-American shale and sand price and market share war against West Texas Intermediate oil to a reduction of output in OPEC. This was the decision of Algiers to raise prices in anticipation of a Saudi Aramco initial public offering of shares next year.
Share prices would be sold at higher prices with this cutback of OPEC production.
The Crown Prince moved to restore subsidies and salaries, based on oil revenue, which were reduced or eliminated as the oil price fell because of market share strategy to lower oil prices to shut down or slow American shale competition from 2014 to late last year. Prices moved upward as OPEC withheld some 1.8 barrels from the World Market. But the commodity market has displayed skepticism after an initial rally that not enough supply has been pushed back to “balance supply and demand” this year.
Oil and the emergence of Saudi Arabian instability should converge in a struggle between the traditionalists or old guard over the control of the Ministry of Oil and indirectly Saudi Aramco as a pre-public company. The new crown prince now in control of the country must not fail as head of the take-over generation. The price of oil must increase another 50 percent to $65 per barrel before the Saudi Aramco sale of its stock worldwide – minimum 5 percent and maximum 10 percent.
If this fails or the sale does not meet expectations, the traditionalist or Old Guard will combine an attack on modernism with a return of Saudi Arabia as the residual or swing world supplier of oil with price setting supply actions of higher output for lower prices or lower output for higher prices.
The outcome will impact the future of American exporters of oil. The take-over modernist will accommodate a “balance” which includes a market for Permian exports. The Old Guard will not. A Second Downturn in 2019, forecast in this column seven months ago, will take place with either outcome, but with mitigation from the take-over generation. President Trump will have lost the Crown Prince and the modernists in the coalition to root out radical Islam as he readies for 2020.
Shale oil producers in the Southwest and North Dakota would be losers, if the Trump strategy is stalled or fails because a traditionalist recovery of civil and oil power in Saudi Arabia. This would occur as Saudi Arabia and OPEC could resort to the market share flood of the world market as in 2014.
As never before, President Trump's 2020 campaign would then strike a new campaign strategy toward a North American oil and gas market with prices determined as continentalist and world oceans imports of oil limited.
The San Juan Basin natural gas future increasingly depends on new markets in Mexico and short-term advantages if Qatar's half of world's supply of LNG is isolated or neutered.
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Farmington NM US 30 Mar 2020