New Saudi king seen sticking with oil output policy

[NEW YORK] King Salman, Saudi Arabia's new ruler, probably will stick to the oil policy of his predecessor, the late King Abdullah, maintaining production levels to preserve market share even at the cost of depressing prices.

A key indicator will be whether Salman, 79, retains the oil minister, Ali al-Naimi, who has driven decision-making since 1995. Naimi, who turns 80 this year, has said he'd like to devote more time to his other job, chairman of the science and technology university named after the late sovereign.

With production of 9.5 million barrels a day and exports of 7 million, Saudi Arabia accounts for more than a 10th of global supply and a fifth of crude sold internationally. The kingdom's refusal to surrender market share to rising US output has contributed to the worst slump in prices since the global credit crisis of 2008.

"The Saudi leadership has already taken the tough decision to live with lower oil prices," Florence Eid-Oakden, chief economist at London-based consultants Arabia Monitor, said by phone. "Naimi is well established, he is respected and there shouldn't be a change as long as the current cabinet is in place." Salman, in his previous capacity as crown prince, read a speech on behalf of the late monarch on Jan. 6 that confirmed the continuity of the country's oil policy in the face of market "tensions" caused by slow growth in the global economy.

"These tensions aren't new to the oil market, and we've dealt with them in the past with a solid will, with wisdom and experience, and we will deal with the current developments in the oil markets in the same way," he said.

Oil slumped 48 per cent in 2014, as Opec's 12 members refused to cut output and yield market share in the face of rising US production. West Texas Intermediate, the US benchmark, fell on Jan 5 to less than US$50 a barrel for the first time since April 2009. It settled at US$46.31 on Jan 22.

In theory, Saudi oil decisions are made by a Supreme Petroleum Council headed by the king and made up of senior members of the royal family, ministers and industry leaders.

In practice, decisions seem to have been left in Naimi's hands, said Simon Henderson in an October research note for the Washington Institute. "Although he is in his late seventies and said to be looking forward to retirement, Naimi retains a firm grip," Henderson said.

Al-Saud Clan While no member of the ruling Al-Saud clan has ever served as oil minister, Prince Abdulaziz bin Salman, a son of the new king, is assistant oil minister and a regular participant in OPEC meetings.

With oil revenue accounting for 46 per cent of Saudi Arabia's GDP, "it is possible that this policy could be relaxed in 2015 because it is very costly financially and is taking its toll on many Arab countries that Riyadh doesn't wish to destabilise," said Francis Perrin, the director of Paris-based energy consultants Stratener, in a Jan 6 e-mail.

Naimi led the Organization of Petroleum Exporting Countries to its Nov 27 decision to keep production unchanged, ignoring pleas for a cut in the group's output by Venezuela, Algeria and other members that depend on higher oil prices to balance their budgets.

"If I reduce, what happens to my market share? The price will go up, and the Russians, the Brazilians, US shale oil producers will take my share," Naimi told the Middle East Economic Survey last month. "Whether it goes down to US$20 a barrel, US$40 a barrel, US$50 a barrel, US$60 a barrel, it is irrelevant." Saudi Production Saudi crude production averaged about 9.7 million barrels last year, according to data compiled by Bloomberg.

The kingdom, with a population of 29 million, has US$736.23 billion in reserve assets, or 6 per cent of the world's total, data compiled by Bloomberg show. The government forecast its budget deficit for this year will widen to 145 billion riyals (US$39 billion) from 54 billion riyals in 2014.

The country will plug the deficit by borrowing and drawing on its financial reserves and will continue to spend on major projects including railroads, electricity, desalination and universities, SPA reported Dec 25, citing Economy Minister Mohammad Al-Jasser.

The 2015 budget forecast revenue falling to 715 billion riyals from 1.046 trillion riyals in 2014, assuming an oil price of US$80 a barrel, Sfakianiakis, who served as an adviser to the Saudi finance ministry, said Dec 26.

"Major policies are not going to be changed without a clear steer from the throne, but beyond the rumors that often circulate there is no evidence to suggest those decisions cannot be made," says Richard Mallinson, a London-based geopolitical analyst with Energy Aspects, in an e-mail.

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