Saudi Arabia asserting itself as ‘dominant’ oil producer
RT:The deficit will reportedly be covered by the Saudi stock of net foreign assets – one of the largest in the world. But how long can the government afford to dig into the fund if oil keeps falling?
Max Fraad Wolff: The good news for Saudi Arabia is that their wealth is such, and so large and internationally diversified and deployed, that they can ride out probably a lot longer than we’re likely to see oil as cheap as it presently is. The bad news is, is that there are demographic and secular economic trends that are very much working against the Saudi economic model, and that’s really brought out to light by the kind of plunging oil prices. But those long-term secular and structural economic problems are a lot harder to solve than a short-term decline in oil prices.
RT:How will Saudi Arabia really be able to weather the storm of low oil prices?
MFW: The Saudi macro system has long been to subsidize all various elements of the economy on huge oil reserves and pool of wealth that was pretty carefully built up over a long period of time. Part of the stress of that, is that you have a disaffected youth with a big unemployment rate that’s grown. And the other is a big demographic problem here; Saudi Arabia has one of the highest birth rates in the world, and so its population is growing very, very rapidly without an economic base to support these people working and getting paid. And so it taxes the revenues from the oil and the country’s wealth at a growing rate, as the population continues to expand much more rapidly than the economy.
RT:The budget did not include a projected oil price, but experts have said that it was built on a price of $80 a barrel. At the same time, Saudi Arabia’s oil minister said OPEC wouldn't budge on its decision not to cut production, even if oil hits $20. So is the 2015 budget wishful thinking?
MFW: Saudi Arabia is really aggressively reasserting itself in its position here as the swing producer of oil. Certainly it still controls that position; this is a very dramatic reminder to the world of the power that comes with that position. That being said, while the extraction prices are very low and Saudi Arabia can withstand much lower prices for a much longer time than almost any other large oil exporter, on the other side of that is that it costs them quite a huge amount and its very painful, and I don’t think anyone who is in the production business wants to see the $20 a barrel, and I don’t think anyone thinks oil is going to go or stay at $20 a barrel at any point in the foreseeable future. So that strikes me as a bold statement of 'Ok, you are much less than anything macro relevant in terms of forecasting where the world is likely to be.'
RT:One theory about the falling oil price is that Saudi Arabia is trying to bring down US shale production. Are there any tensions between Washington and Saudi Arabia amid such reports?
MFW: It’s certainly possible. I think that's more about saying, 'Look. We're in a situation unlike anyone else. That's why we have the power we do in the oil market, we have a huge supply, huge proven reserves, a very low extraction price.' And so unlike lots of other countries – and I think they’re thinking about Russia, they’re thinking about Venezuela, they’re thinking about Nigeria, even to some extent the US – 'unlike other people, we can deal with a lower oil price because we have more oil, it’s easier to extract at a low price and so we are not as vulnerable to these low oil prices as maybe the world thinks we are.' And that may be even more important to announce when you look a little bit vulnerable, because you’re putting out a 2015 budget forecast that says for the first time since 2009, we’re back in the red, in other words we’re running a budget deficit. So it’s even more important to assert that you’re immune, because there is some evidence that you’re not completely immune in the budget deficit.
RT:Why doesn’t OPEC do more to stabilize oil prices?
MFW: Well certainly there's a good amount of diversity, and there’s never an absolutely uniform opinion inside OPEC; different countries with different extraction prices, different macro-economic needs. That being said, Saudi Arabia and some of the other Gulf states have clearly asserted their dominant position – and whatever they do, there’s some grumbling, there’s some upset, usually the way we really see that takes more time, and that is to what extent people start to cheat. Now unfortunately it’s easier to cheat when oil prices are high and you overproduce to make a little extra money. It’s hard to cheat when oil prices are low and dump more oil in the market, because when you do that, you do things that put in place the pressures that lower oil prices further. But we’ll see the grumbling, especially if oil prices stay low, and we’ll see some people probably cheating a bit on their various quotas.
RT:The falling oil price offers some leverage in the Iran nuclear talks. If sanctions are lifted and more Iranian oil floods the market, how far will the prices drop?
MFW: So, clearly the West and Iran have been tangled up in a long-standing negotiation. It looks like the both West, particularly the US, and the Iranian authorities have a lot of political reasons to downplay the successes that they’ve likely made, although no agreement seems immediately forthcoming. If Iran is able to get out from underneath the sanctions, and if Iran therefore gets on the track to produce more, it could have long-term downward oil price pressure. However, the Iranian oil infrastructure has suffered decades of neglect and it would be quite a while before international investment and the removal of sanctions would meaningfully increase Iran’s average daily oil production. Additionally, the Iranian population has more than doubled since the sanctions began. Domestic consumption of energy resources will also serve to limit how quickly additional oil could go on the global market, even if Iran begins to move towards the long, slow process of modernizing its extraction and production facilities.
RT:Who would benefit from a lifting of sanctions against Iran?
MFW: As Iran’s limited international oil footprint presently stands, if Iran was able perhaps through production and elimination of sanctions to increase its oil production, the way it's set up now, that would probably mostly benefit China and Japan and Iran itself – as oppossed to immediately being made available to the US.