Aramco Development Halt Has Nothing to Do With Oil Demand

Saudi Aramco is abandoning plans made in 2020 to increase field production from 12 to 13 million barrels per day. The announcement has provoked analyst comments that the decision is because of weaker oil demand.

“Demand growth is till continuing but it’s a little bit slower. In the short-term, we don’t need 13 million barrels per day. I don’t think this a statement that it’s going to be never. I think it’s more that it doesn’t need to happen in the short-term.”

Amrita Sen, Energy Aspects

Ms. Sen’s view makes no sense. If the drop in demand is transient, why does Aramco bother to even make this announcement? After all, demand growth expectations have not changed materially from when Aramco decided to expand field development a few years earlier.

There is also speculation that the announcement reflects longer-term concern about “peak demand.”

“The lack of an explanation for the shift from the company has invited a flood of speculation, notably whether Riyadh has grown more pessimistic about oil consumption as the world shifts toward low-carbon energy. Forecasters such as the International Energy Agency see demand for oil hitting a limit in the next few years.”

Grant Smith, Bloomberg

Mr. Smith’s perspective is inconsistent with Saudi Aramco’s and OPEC’s view that oil demand will continue to be robust for the foreseeable future.

Javier Blas commented that the announcement is not related to peak demand.

“Any attempt to extrapolate the Saudi cancellation as evidence that the world is now truly shifting away from fossil fuels is a mistake…World oil demand is poised to accelerate for several years before peaking later in the 2030s…But that extra consumption will be satisfied by non-Saudi sources.”

Javier Blas Bloomberg

The truth is that Aramco’s announcement had nothing at all to do with demand. The Saudi government ordered Aramco to stop field development under a law that limits Maximum Sustainable Capacity—MSC—at 12 million barrels per day.

“Aramco announces that it has received a directive from the Ministry of Energy to maintain its Maximum Sustainable Capacity—MSC—at 12 million barrels per day.”

Saudi Aramco

Production cuts have increased spare production capacity and new field development in addition to that amount will exceed the capacity limits required by the MSC directive by 2027. That is why development was halted.

Blas noted this in his post and then proceeded to describe the kingdom’s failure to balance market share and price considerations in its policy moves.

“Riyadh appears determined – or resigned – to keep production lower-for-longer to keep oil prices higher-for-longer. Only if the kingdom were ready to accept much lower prices there would be demand for extra Saudi oil because, over time, investment would drop elsewhere, notably in the US shale industry.”

Javier Blas Bloomberg

I disagree with Mr. Blas that the world is transitioning away from Saudi to American oil. The composition of the two crude types is completely different and U.S. light oil cannot be substituted for heavier Saudi grades in most of the. world’s refineries.

I agree with Blas that Saudi Arabia and OPEC+ have managed oil markets poorly over the last decade and hurt themselves as a result.

Saudi Arabia imagines itself a master of oil strategy but it’s not. It sacrificed price for market share in 2014 by choosing not to support prices in the face of surging U.S. production from shale (Figure 1). The world got lower prices for the next three years as Saudi leaders unsuccessfully tried to bankrupt the shale industry.

Then in late 2016, it changed course and OPEC+ began a series of production cuts that continue today. Its timing then was odd because prices had already begun to rise (Figure 1). Those cuts had little effect on the slow recovery that resulted from failure to cut when it mattered in late 2014.

When prices collapsed in early 2020 with the global Pandemic, Saudi Arabia and OPEC+ failed to act again when it mattered and let oil prices fall to record lows before taking action. Two months later in May 2020, the producer group finally cut almost 10 million barrels per day.

OPEC+ cut production again in October 22 and twice in 2023 despite the continued message of strong oil demand in OPEC’s monthly oil market reports. Those projections have lost credibility and are viewed by many as exaggerations to pitch Saudi Arabia’s and OPEC’s book to investors.

In retrospect, the decision not to support prices in late 2014 may have been a good idea if OPEC+ had stayed the course and not cut production in 2016. Markets probably would have continued the adjustment toward higher prices already ten months underway at time of the cuts in November. The same may have been true in 2020. At the very least, Saudi Arabia and its producer partners would not have lost market share as they continue doing today.

Oil is the largest commodity market in the world. It cannot be managed. It can be moved for short periods of time with well-timed interventions by producers or traders but no one is smart enough or rich enough to sustain those kinds of maneuvers. It is hubris for Saudi Arabia or anyone else to think otherwise.

Some probably think that the decision to halt field development was because Saudi Arabia’s reserves are less than claimed. The only data point is Degolyer and McNaughton’s 2019 reserve audit that largely confirmed those claims despite concerns by some skeptics.

Recent discoveries including Al-Reesh and Al-Sahbaa, and Al-Hiran and Al-Mahakik indicated world-class volumes of unconventional oil and gas and associated condensate. New field development completed before this week’s cancellation will bring 1.25 million barrels per day of new supply on line in the near future. I find no empirical reason to doubt the Kingdom’s reserves or production capacity for now.

The decision to halt field development had nothing to do with Saudi reserves or world oil demand. As TV network news anchors say, “there’s no there there.” It was because of Saudi law.