Extra responsibility for Saudi Arabia



Alsir Sidahmed

Published — Friday 20 June 2014

Last update 19 June 2014 11:21 pm

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The recent OPEC meeting was a non-event to the extent that most of the world media failed to show up to cover the meeting. No wonder.
A roll over of the existing 30 million barrels per day (bpd) was expected and what happened was exactly like before in similar meetings.
For quite some time, the organization under the leadership of Riyadh, has managed to come with a new working formula devoid of typical political maneuvering — namely, freezing discussions on quotas, keep an eye on the demand and supply fluctuations and adjust whenever necessary by pumping more oil or cut some, and at the same time leave the price to be determined by the market.
This swing approach is practiced by Riyadh as a sovereign exercise that the organization has nothing to do with it. The result of all this is “supply is good, demand is good, the price is good,” said Minister of Petroleum and Mineral Resources Ali Al-Naimi while speaking to reporters before the meeting in Vienna.
However, the sky is not expected to stay clear and blue all the time as there are two looming problems.
The non-event meeting coincided with the outburst of violence in Iraq, which has seen its production growing steadily over the past period to the extent that it became the second biggest producer within OPEC.
The expanding sectarian strife could threaten oil installation and, more important, the political stability of the country could have its impact on the flow of Iraqi oil eventually.
Problems related to political stability and security are hitting other producers like Libya, where militias have in effect barred oil exports, or Nigeria which is facing a growing insurgency and on the top of the list is Iran, which has been reeling under Western sanctions or other members within the organization at a time when supplies from outside OPEC are diminishing.
So far, Saudi Arabia has been holding the balance as it is believed to be pumping 9.7 million bpd currently against a production capacity of 12.5 million bpd. So the market is quite comfortable with this available spare capacity.
But that will not be the case if the situation is to deteriorate more in Iraq, Libya or in any other OPEC member country to the extent that Riyadh finds itself eating up in that spare capacity.
In a market so sensitive, perceptions like oil supply shortages will impact prices immediately.
However, more seriously, the continuing violence in a number of OPEC member countries will result in blocking the way of investments needed in new projects or expansion of existing ones.
Even before the recent escalation of violence in Iraq, the Organization for Economic Cooperation and Development (OECD) said in a report that potential fall in investment in production in the Middle East could lead to a $ 15 increase in the price of a barrel in little over a decade.
The report issued earlier this month said that the world needs to invest some $40 trillion on projects related to energy supply and another $8 trillion on energy efficiency by 2035 to meet growing demand and replace output in ageing fields.
On its part the Paris-based International Energy Agency (IEA) stated that a big portion of the expected investment to increase production needs to come from the Middle East as the US shale oil will start to lose its momentum in the mid-2020s.
The IEA report warned that failure to come up with such investments in the appropriate time will result automatically in higher oil prices.
In addition, and because of climate change that will result in rising of average temperature, a total of $53 trillion ought to be spent on energy efficiency and less on fossil fuels.
Available record shows that investment in energy production stood last year at $1.6 trillion, which is a big jump compared to what it was more than a decade ago.
Spending on renewable energy sources also rose remarkably from $60 billion at the beginning of this decade to peak at $300 billion three years ago, though it dropped last year to $250 billion.
The big question it seems will be not whether there are oil and gas reserves or money to extract it, but the political stability and security that make such ventures worthwhile and achievable.
The current Middle East forecast does not look encouraging and that is why places like Saudi Arabia shoulder extra responsibility.

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