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World Oil Prices Rise on Rumor of Saudi Production Cut

FILE - Lower U.S. oil prices reflect a broad slump across world financial markets, Jan. 20, 2016.
FILE - Lower U.S. oil prices reflect a broad slump across world financial markets, Jan. 20, 2016.

Energy market watchers credit an increase in oil prices to rumors of a possible production-cut deal that would include Saudi Arabia, other OPEC nations and Russia. The average oil price had dipped well below $30 a barrel recently, but is now around $31.

The rumor that has been circulating in oil markets around the world this week involves a possible deal between Saudi Arabia, other oil-producing states in the same region and Russia. The Saudis would be key, though, because of the desert nation’s large reserves and its ability to increase or decrease production to affect the world market acting unilaterally.

In an interview with VOA, Jim Krane, geopolitical energy analyst at Rice University’s James Baker Institute for Policy Study, said that the Saudis would need some large oil-producing states outside of OPEC to cooperate, and they would need to see some cutbacks by large private oil companies as well.

“When they see a large enough drop in production and investment and, if indeed, the Russians and a couple of others are willing to go along with it … I could see them cutting production,” Krane said. “If they did, it would probably be a modest reduction, and I would suspect it would be in heavy oil.”

Heavy oil comes out of the ground without natural gas, which the Saudis rely on for much of their domestic energy. Citizens of the kingdom enjoy some of the lowest energy costs in the world.

Krane says one reason Saudi Arabia might like a deal to stabilize international crude oil prices is that the current slump is taking a toll domestically.

“The Saudis are very concerned about oil prices,” he said. “This is on everyone’s mind over there. We have a new king in power and some new administrators, who are launching some interesting new policies. We are seeing an increase in domestic energy prices in Saudi Arabia for the first time in decades. The price increases themselves have been modest, but the government is saying there are more to come.”

Saudis wary of competition

Krane, who recently visited Saudi Arabia and plans to return there next week, says Saudi leaders will be cautious about any deal because they are concerned about competition from the United States and Iran, which is expected to start selling more crude now that international sanctions have been lifted.

The U.S. Energy Information Administration has said that the United States has even greater proven oil reserves than Saudi Arabia based on estimates of what could be produced from deep shale deposits. U.S. producers have used horizontal drilling and rock fracturing technology to free up both oil and gas trapped in shale rock deep underground.

The slump in oil prices has driven some U.S. companies out of the shale fields, but others, working in lower-cost areas, have continued, adding to the glut of oil on the market.

For this reason, Krane does not think the Saudi government will be in a hurry to make any deal to bring prices back up.

“Longer term,” he said, “I think the Saudis see lower oil prices as good for them. Low oil prices can kind of rekindle global demand for oil and make oil competitive with other types of energy, including renewables.”

Maintaining market share

Saudi Arabia has been investing heavily in its own solar energy industry, which could one day provide revenue from exported electricity. Krane also thinks the Saudis see some long-term benefit in U.S. shale oil development if it would provide the world a steady source of oil to stabilize markets and take some of that burden off Saudi Arabia.

But, he says, Saudi Arabia does not want to see too much competition develop and risk losing the market share that makes the desert kingdom a rich and important nation on the world scene.