What Saudi Arabia Can Do to Lead Again on Oil

(Bloomberg Opinion) -- In the wake of Monday’s historic plunge in crude-oil futures, Saudi Arabia issued a press release stating that it will “endeavor to achieve stability” in a market currently suffering from a disintegration of demand. For the kingdom, it is vital not only to raise the price of oil, but also to be a leader in the effort to do so.

With a struggling, one-dimensional economy, the Saudi monarchy needs higher prices to keep its political future secure. Moreover, the kingdom has long valued its image as the most influential force in oil, and it wants to return to a leadership position within OPEC and the markets. Riyadh cannot increase oil demand, but it can take steps to fix oil prices, protect the monarchy and return Saudi Arabia to a position of stabilizing leadership. This would require some tough decisions and sacrifices — perhaps more than the government is willing to make, and there’s a chance they could backfire. Nevertheless, here’s what Saudi Arabia could do:

Energy Shake-Up?
The current energy minister, Prince Abdulaziz bin Salman, lost the confidence of the markets when Saudi Arabia recklessly announced a plan for extreme oversupply last month and then followed through with the policy even when it was clear that global demand had collapsed. It was Saudi Arabia’s announcement, not Russia’s refusal to cut more oil, that led directly to the initial descent of oil prices on March 9. Even the Easter OPEC+ production cut was credited by many to President Donald Trump, not Saudi Arabia’s energy minister. Replacing Abdulaziz with an oil figure within the ranks of Saudi Aramco’s base in Dhahran might help build trust in the market. While removing King Salman’s son from his position would be a major step, it wouldn’t be without precedent. Another of the king’s sons, Khalid bin Salman, was ambassador to the U.S. before Salman recalled him after the backlash that followed the 2018 murder of Saudi journalist Jamal Khashoggi.

Previous energy ministers Ali Al-Naimi and Khalid Al-Falih were career Aramco oilmen with strong reputations who earned respect in their positions. While it would be inadvisable to move Aramco CEO Amin Nasser into that slot during the current crisis — especially now that Aramco is a public company — other good choices could be a current or former vice president. To build maximum trust within the markets, a new minister could be installed in a public announcement in English (not Arabic) while markets are open in London and New York. Ideally, both Al-Falih and Al-Naimi would be present at the announcement to show support, because they are respected globally. Furthermore, both former ministers could be announced as advisers to the new minister. The announcement must clarify that in the future Saudi Arabia’s oil policy will be based on maximizing profit for the kingdom and stability for the markets. The markets need to have faith in industry leaders. If political leaders are serious about maintaining power in Riyadh, they must consider publicly relinquishing power in Dhahran.

Unilateral Cuts
Saudi Arabia cannot scale back production enough on its own to make up for the demand shock, but it can commit to unilateral reductions a few months out, which would begin to provide predictability to the oil markets. The markets currently lack confidence in talks about potential cuts, such as recent rumors that Saudi Arabia and/or OPEC+ will soon make additional reductions. If Saudi Arabia wants to be the critical player in oil, it could announce unilateral production cuts and explicitly delineate them by week or month for a given period.

For example, if Saudi Arabia believes the current demand crisis will last for another six months, it could lay out now how much it will produce for that period in monthly or bimonthly increments. The markets like predictability, and this would be the first step. Of course, Saudi Arabia and other producers may have no choice but to ratchet back production should demand stay as weak as it is, with storage becoming a problem. But Saudi Arabia would gain more credibility by being first to do so, and could better encourage other producers to join in being responsible participants in the global economy. This week, the OPEC Secretariat said that OPEC+ “held informal teleconference to brainstorm the current dramatic oil market situation” without Saudi Arabia. Unilateral and telegraphed cuts from the kingdom would help win back the confidence of the oil markets and leadership in OPEC and the industry.

Budget Austerity
Price recovery will not be immediate because of the persistent pandemic, the resulting recession and nearly full oil storage. Right now, the markets are confused by Saudi Arabia and its shifting strategies. If the kingdom lays out a new budget and explains how it will survive low oil prices, Saudi desperation will be one less concern to send markets fluctuating.
Wednesday’s announcement by finance minister Mohammed Al-Jadaan that the kingdom might take on more debt to deal with budgetary shortfalls may not go far enough. The markets know what drives the U.S. oil industry: profits for each company. But it isn’t clear what is driving the Saudi oil industry at the moment, so Saudi Arabia should lay it all out there as a calming force and the responsible leader it wants to be.

None of these steps would necessarily be easy, nor would they come without sacrifice. But there are times when difficult choices and sacrifices have the potential to offer a better path forward than the status quo. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ellen R. Wald is president of Transversal Consulting and a nonresident senior fellow at the Atlantic Council's Global Energy Center.

©2020 Bloomberg L.P.

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