New Saudi monarch adept at using oil, market influence

Under King Abdullah bin Abdul-Aziz, Riyadh will continue to play its long-running role as oil market moderator that he championed as Crown Prince after his half brother King Fahd suffered a stroke in 1995.

“The Crown Prince, now King, was very much an architect of Saudi Arabia’s oil policy, so there is unlikely to be any radical change,” said Paul Horsnell of Barclays Capital.

Though careful to avoid stating a preferred target price, Saudi officials see $50 crude as too high for a healthy global economy.

In an effort to keep world markets supplied and prices moderate, Riyadh has raised production in recent months to 9.5 million barrels per day (bpd), supplying 11 per cent of the world’s crude and pushing Opec output to a 25-year high.

“Saudi Arabia will continue to give its customers what they want,” a Saudi source said following the death of King Fahd on Monday.

But despite high pumping rates from Opec, led by Saudi Arabia, oil is trading within a dollar of a record high of $62.10 as rising world energy demand, especially in Asia, leaves little spare output capacity.

Saudi Arabia alone holds significant excess production.

With output capacity strained, international oil companies are piling pressure on big producers to break down investment barriers. But Abdullah is unlikely to soften Riyadh’s hard line on foreign involvement in oil.

“There’s no reason for Abdullah to change a policy that’s been in place the past decade,” said a Western oil executive. ”So getting into Saudi oilfields is the least of our thoughts.”

State oil company Saudi Aramco’s expertise and piles of cash enable it to drill for oil under its own steam, say Saudi officials. The upstream oil sector, home to 264 billion barrels of crude, has been off-limits to multinationals since the 1970s.

Oil export revenues make up around 90 to 95 per cent of total Saudi export earnings, 70 to 80 per cent of state revenues and around four percent of the country’s gross domestic product.

Mindful of consumer concerns, Riyadh has gone out of its way to offer assurances on the supply front -- promising to maintain a spare oil capacity cushion of 1.5 million to 2 million bpd.

Riyadh put that buffer to good use in 2003 when it lifted output to compensate for shortages from Venezuela and Nigeria and to curb a price spike ahead of the US-led attack on Iraq.

To maintain its spare capacity and keep up with growing demand, Saudi Arabia is embarking on a $50 billion drive to boost output capacity to 15 million bpd from 11 million bpd.

That bold effort was discussed during Abdullah’s meeting with U.S. President George W. Bush at his Texas ranch in April.

Saudi Arabia is a leading supplier to the United States, which absorbs about 1.6 million bpd of Saudi crude out of total imports of about 10 million bpd.

While North American and European markets remain vital to Riyadh, Saudi Aramco is aiming to capture higher oil sales in energy-hungry Asia. Aramco already ships about 60 per cent of its overseas oil sales, or some 4.5 million bpd to the region.

Abdullah has helped smooth internal politics of the Organisation of the Petroleum Exporting Countries, notably between Riyadh and Teheran, the group’s second biggest producer.

Saudi Arabia is not shy about using its leverage to get cooperation from producers outside OPEC when necessary.

When oil prices plunged to $10 in 1998, Abdullah was instrumental in orchestrating a series of dramatic supply cuts with non-aligned producers Norway and Mexico.

“It has been his guiding hand over Saudi global strategy which has helped OPEC to engineer higher prices since the late-1990s,” said the Petroleum Finance Company.

Another lasting achievement by the new king was forging stronger bonds with Russia, Saudi Arabia’s chief rival outside OPEC, and China, its most promising new market.

His efforts led to firms signing deals to explore for gas in the kingdom, which holds 236 trillion cubic feet of natural gas.

Abdullah opened the contest for Saudi Arabia’s gas riches in 1998, when he hand-picked eight of the world’s top oil firms to invest in a $25 billion natural gas opening.

But only one project worth up to $2 billion involving Royal Dutch/Shell and Total survived after a dispute over commercial terms.