 "Prices are down, but Saudis keep oil flowing")
The international cartel of oil producers has long followed the same basic strategy. When the market was soft, the group slashed production to raise prices.
But Saudi Arabia, the heavyweight of the Organization of the Petroleum Exporting Countries, has a new agenda. It is now less concerned about the price of crude oil in the global markets and more concerned about delivering fuel to its growing economy.
The shift is upending the traditional market dynamics that have influenced the direction of oil prices for decades.
While American producers are pulling back in the face of the current weak prices, Saudi Arabia, the largest Opec producer by far, has been pumping more and more barrels. Saudi Arabia's daily production in March and April nearly equalled its record output in 1980 when prices were soaring.
The country's allies, Kuwait and the United Arab Emirates, are also drilling at record rates, while Iraq is shrugging off widespread civil conflict to increase production. Even Iran is preparing plans to develop more oil fields.
The surging output has taken much of the mystery out of what the delegates of the 12 Opec countries will do when they assemble in Vienna this week to set production levels for the next six months. They have already pushed the cartel's output 3 per cent above the current target, and production appears to be heading even higher.
The acute pressure to cut production is also off. Oil prices, after a sharp drop over the last year, have stabilised somewhat at more than $60 a barrel.
"No cut is coming," said Rene G Ortiz of Ecuador, a former secretary general of Opec. "Each and every country, and particularly the Saudis and the other monarchies of the gulf, will protect their market share and increase their market share as much as possible."
For decades, Saudi Arabia was the primary force that made Opec the swing producer in global markets.
After Saudi Arabia's production peaked in 1980, it cut supplies later in the decade and again in the 1990s to prop up prices. The Saudis followed the same playbook when oil prices briefly sank during the 2008 global financial crisis and the economic slump the next year. When political turmoil rocked Libya, another producer, during the Arab Spring, Saudi Arabia increased production to keep markets and its own revenue stable.
Now, Saudi Arabia's role - and the broader market - is evolving.
United States oil production has nearly doubled over the last six years, crowding out Saudi Arabia and other Opec imports. The situation has forced foreign producers into stiffer competition in Asia with supplies that once flooded the American market.
Saudi Arabia also needs to focus on its own larger and more diverse domestic needs. As the population has surged and the middle class has expanded, consumption has skyrocketed in recent years. Energy subsidies intended to prevent political instability have only added to the demand.
With consumption increasing, Saudi Arabia has been moving up the value chain, looking beyond exporting crude oil to higher-margin businesses like refining and petrochemicals. The country has a new $22 billion joint venture with Dow Chemical and several new refineries costing $12 billion each.
Saudi experts say oil policy is increasingly being set by younger technocrats surrounding the new king, Salman, who came to the throne in January. While the new leadership is still focused with the price of crude, it is equally attuned to how any cuts in production might slow the overall Saudi economy and hurt jobs at a time when political turbulence is spreading across the region.
The group of senior government officials and oil executives saw the drop in oil prices coming last year. And they successfully argued that short-term reactions to bolster prices in the middle of terrorist attacks and revolutions around the region only supported less-efficient production in places like the United States and Canada.
"Is Saudi Arabia still willing to play the swing producer and juggle the whole domestic economy, refineries, power plants, desalination, petrochemicals, just to meet the expectations of either Opec or non-OPEC producers? The answer is no, obviously not," said Sadad Ibrahim al-Husseini, a former executive vice president for Saudi Aramco, the state oil company.
"It is very inefficient to put up a lot of capacity and then shut it down and then start it up - to try to second-guess market trends and all sorts of political considerations that are very damaging to the economy," Mr. al-Husseini added.
Energy consumption in Saudi Arabia is growing faster than in almost any other country in the world, at an average of 6 percent a year over the last decade. Oil is the base fuel for Saudi electricity and desalination of water for the desert kingdom, and any shift to nuclear power and renewable sources like solar has been slow.
That makes any production cut a more delicate issue.
In the 1980s, during a prolonged oil price drop, Saudi Arabia cut about four million barrels a day of production in an unsuccessful attempt to stabilise the market. A similarly sized cut would no longer be possible, energy experts say.
Saudi Arabia is pumping 10.3 million barrels a day. The kingdom needs to produce nearly eight million barrels to collect the natural gas that comes out of the ground with the oil; such gas is critical for powering its residential and industrial needs.
"The demand for gas keeps increasing," said Jean-Francois Seznec, a professor of Persian Gulf political economy at the School of Advanced International Studies at the Johns Hopkins University. "They have a limit to how much oil they can cut. That creates more limits on their ability to manage the market."
As the Saudis' taste for luxury has expanded, so, too, has domestic demand for gasoline, diesel and jet fuel. It has grown 60 percent since 2005, converting the kingdom to a net importer of transportation fuel from an exporter.
That has stretched the output of the nation's refineries, with production of processed fuels rising nearly 30 percent in the last decade to 2.3 million barrels a day. With new refineries being built, output is expected to rise to three million barrels a day by the end of the decade.
Saudi Arabia remains a crucial power in global oil markets. But the quality of much of its crude oil production has declined over time, with more of its production including heavier, more sour crudes which are sold more cheaply on global markets than the sweeter varieties.
To compensate, Saudi Arabia has spread its refinery business across the globe, building and expanding in the United States, China, Japan and South Korea. Many of those ventures are meant to process lower Saudi grades of crude to defend against similar products, particularly in Latin America. Those refineries depend on more than two million barrels of Saudi exports a day, further reducing the country's ability to cut crude output.
"You invest all this money in refining, and you need to supply it with a steady supply of crude no matter what," said Jim Krane, a Middle East oil expert at the James A. Baker Institute for Public Policy at Rice University. "You can't really have all your production spoken for and still be a flexible swing supplier that acts to calm market volatility."
While Saudi Arabia's sway is changing, the domestic and overseas investment also gives the country a significant advantage in an increasingly competitive business. A huge refinery network provides the Saudis with a home for their oil at a time when they are battling Opec rivals like Iran and Iraq over markets, especially in Asia.
"When competition is so keen to sell crude oil, the Saudis sell it in dedicated systems that they control. They don't have to fight for every barrel," said Fereidun Fesharaki, chairman of FGE, a market research firm. "No one else can do this."
But Saudi Arabia, the heavyweight of the Organization of the Petroleum Exporting Countries, has a new agenda. It is now less concerned about the price of crude oil in the global markets and more concerned about delivering fuel to its growing economy.
The shift is upending the traditional market dynamics that have influenced the direction of oil prices for decades.
While American producers are pulling back in the face of the current weak prices, Saudi Arabia, the largest Opec producer by far, has been pumping more and more barrels. Saudi Arabia's daily production in March and April nearly equalled its record output in 1980 when prices were soaring.
The country's allies, Kuwait and the United Arab Emirates, are also drilling at record rates, while Iraq is shrugging off widespread civil conflict to increase production. Even Iran is preparing plans to develop more oil fields.
The surging output has taken much of the mystery out of what the delegates of the 12 Opec countries will do when they assemble in Vienna this week to set production levels for the next six months. They have already pushed the cartel's output 3 per cent above the current target, and production appears to be heading even higher.
The acute pressure to cut production is also off. Oil prices, after a sharp drop over the last year, have stabilised somewhat at more than $60 a barrel.
"No cut is coming," said Rene G Ortiz of Ecuador, a former secretary general of Opec. "Each and every country, and particularly the Saudis and the other monarchies of the gulf, will protect their market share and increase their market share as much as possible."
For decades, Saudi Arabia was the primary force that made Opec the swing producer in global markets.
After Saudi Arabia's production peaked in 1980, it cut supplies later in the decade and again in the 1990s to prop up prices. The Saudis followed the same playbook when oil prices briefly sank during the 2008 global financial crisis and the economic slump the next year. When political turmoil rocked Libya, another producer, during the Arab Spring, Saudi Arabia increased production to keep markets and its own revenue stable.
Now, Saudi Arabia's role - and the broader market - is evolving.
United States oil production has nearly doubled over the last six years, crowding out Saudi Arabia and other Opec imports. The situation has forced foreign producers into stiffer competition in Asia with supplies that once flooded the American market.
Saudi Arabia also needs to focus on its own larger and more diverse domestic needs. As the population has surged and the middle class has expanded, consumption has skyrocketed in recent years. Energy subsidies intended to prevent political instability have only added to the demand.
With consumption increasing, Saudi Arabia has been moving up the value chain, looking beyond exporting crude oil to higher-margin businesses like refining and petrochemicals. The country has a new $22 billion joint venture with Dow Chemical and several new refineries costing $12 billion each.
Saudi experts say oil policy is increasingly being set by younger technocrats surrounding the new king, Salman, who came to the throne in January. While the new leadership is still focused with the price of crude, it is equally attuned to how any cuts in production might slow the overall Saudi economy and hurt jobs at a time when political turbulence is spreading across the region.
The group of senior government officials and oil executives saw the drop in oil prices coming last year. And they successfully argued that short-term reactions to bolster prices in the middle of terrorist attacks and revolutions around the region only supported less-efficient production in places like the United States and Canada.
"Is Saudi Arabia still willing to play the swing producer and juggle the whole domestic economy, refineries, power plants, desalination, petrochemicals, just to meet the expectations of either Opec or non-OPEC producers? The answer is no, obviously not," said Sadad Ibrahim al-Husseini, a former executive vice president for Saudi Aramco, the state oil company.
"It is very inefficient to put up a lot of capacity and then shut it down and then start it up - to try to second-guess market trends and all sorts of political considerations that are very damaging to the economy," Mr. al-Husseini added.
Energy consumption in Saudi Arabia is growing faster than in almost any other country in the world, at an average of 6 percent a year over the last decade. Oil is the base fuel for Saudi electricity and desalination of water for the desert kingdom, and any shift to nuclear power and renewable sources like solar has been slow.
That makes any production cut a more delicate issue.
In the 1980s, during a prolonged oil price drop, Saudi Arabia cut about four million barrels a day of production in an unsuccessful attempt to stabilise the market. A similarly sized cut would no longer be possible, energy experts say.
Saudi Arabia is pumping 10.3 million barrels a day. The kingdom needs to produce nearly eight million barrels to collect the natural gas that comes out of the ground with the oil; such gas is critical for powering its residential and industrial needs.
"The demand for gas keeps increasing," said Jean-Francois Seznec, a professor of Persian Gulf political economy at the School of Advanced International Studies at the Johns Hopkins University. "They have a limit to how much oil they can cut. That creates more limits on their ability to manage the market."
As the Saudis' taste for luxury has expanded, so, too, has domestic demand for gasoline, diesel and jet fuel. It has grown 60 percent since 2005, converting the kingdom to a net importer of transportation fuel from an exporter.
That has stretched the output of the nation's refineries, with production of processed fuels rising nearly 30 percent in the last decade to 2.3 million barrels a day. With new refineries being built, output is expected to rise to three million barrels a day by the end of the decade.
Saudi Arabia remains a crucial power in global oil markets. But the quality of much of its crude oil production has declined over time, with more of its production including heavier, more sour crudes which are sold more cheaply on global markets than the sweeter varieties.
To compensate, Saudi Arabia has spread its refinery business across the globe, building and expanding in the United States, China, Japan and South Korea. Many of those ventures are meant to process lower Saudi grades of crude to defend against similar products, particularly in Latin America. Those refineries depend on more than two million barrels of Saudi exports a day, further reducing the country's ability to cut crude output.
"You invest all this money in refining, and you need to supply it with a steady supply of crude no matter what," said Jim Krane, a Middle East oil expert at the James A. Baker Institute for Public Policy at Rice University. "You can't really have all your production spoken for and still be a flexible swing supplier that acts to calm market volatility."
While Saudi Arabia's sway is changing, the domestic and overseas investment also gives the country a significant advantage in an increasingly competitive business. A huge refinery network provides the Saudis with a home for their oil at a time when they are battling Opec rivals like Iran and Iraq over markets, especially in Asia.
"When competition is so keen to sell crude oil, the Saudis sell it in dedicated systems that they control. They don't have to fight for every barrel," said Fereidun Fesharaki, chairman of FGE, a market research firm. "No one else can do this."
©2015 The New York Times News Service