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Failure In Doha: Naimi Overruled As Saudis Double Down on Market Share Strategy

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By JIM KRANE

Once in a while an event allows us to see inside the opaque decision-making process in Saudi Arabia.

The dueling Saudi positions in Sunday’s failed oil freeze talks in Doha represent one of these opportunities.

When the 18-nation talks ended, the kingdom’s long-time oil minister, Ali Naimi, had been overruled. The rising power of Deputy Crown Prince Muhammad bin Salman was on full display.

Ahead of the meeting, Naimi and Crown Prince Muhammad staked out opposing positions.

Prince Muhammad took a hard line, declaring that the Saudis would not freeze production unless “all main producers” including Iran joined in.

Naimi suggested an alternate stance: The Saudis might be willing to forge a producers’ agreement without Iran. A Saudi draft agreement circulating at the meeting said as much.

The failure of Sunday’s summit tells us that Prince Muhammad is in firm command of Saudi oil market strategy. The Minister of Petroleum and Minerals may no longer even represent an inside participant in the process.

Most surprising is that the Doha talks happened at all. From the start Iran made its position crystal clear: No production freeze until we reach pre-sanctions output. After all, increasing Iranian production was the big incentive behind the nuclear deal with the West.

All 18 participants understood this. Iran did not even bother to send a representative.

The only reason the Doha talks went ahead was because Naimi was saying that the Saudis would move ahead without Iran.

Until Sunday, Naimi’s words could be taken at face value. His statements were so universally viewed as credible that they moved markets. Now we are left wondering about Naimi’s standing in the Saudi power structure, along with the rationale for scuppering the talks.

If Prince Muhammad’s plan all along was to show no flexibility, why did he let the meeting go forward?

It’s impossible to know for sure. But a few possibilities suggest themselves:

  • It is possible that an internal battle for dominance of Saudi oil policy was playing out, and that Prince Muhammad only just succeeded in solidifying control over the technocrats within the government and its oil company.
  • It is also possible that Muhammad bin Salman’s position may have wavered and then hardened as the meeting progressed.
  • The Saudis and their Gulf allies may have sought a pretext to intensify their conflict with Iran. Perhaps the Saudis meant to portray Iran as the intransigent party, blaming them for the wasted efforts of so many producer countries.
  • It might also be that the Saudis prefer a longer period of lower oil prices. The recent run-up to $40 was threatening to revive the US shale sector and investment in new production elsewhere.
  • It is also possible that the Saudis want to increase their share of the crude oil market.

Figuring out Saudi governance aims under King Salman is becoming an academic staple. At the end of the day, the failure in Doha may signal that competing oil producers need to move aside. For the Saudis, “market share” looks like the paramount variable, rather than price.

Given the vast Saudi reserves and the rock-bottom cost of production, the Saudis can certainly increase their market share beyond their long-held 13%. The reason they haven’t already done this is because price was a more important concern. By withholding supply, they kept prices up and preserved reserves for future generations of Saudis.

But high prices encouraged investment into non-OPEC oil, and into substitutes. The new Saudi leadership may see low prices serving their needs in two ways: reining in competing producers, and prolonging oil’s viability as a transportation fuel.

The Saudis may even want to accelerate their depletion strategy, pumping more oil now and saving less for future generations.

Why would they want to exhaust their reserves more quickly? A pair of long-term risks may offer clues:

One risk is the timing of global oil demand reaching a peak and thereafter shifting into decline. The Saudis may see signs of this already. Chinese demand is slowing and competing transportation technologies are gaining popularity – albeit from a tiny base.

Cheaper and more plentiful oil could revive demand and push back the onset of a peak. And if that strategy doesn’t work, at least the kingdom is able to monetize a larger share of its reserves.

It’s also possible that Saudi strategists fear climate-based risks to their oil reserves.

The imperative of reducing greenhouse gas emissions means that much of the oil underground can never be burned. At least one recent study suggests that the Middle East would see a larger-than-average portion of its oil rendered “unburnable.”

Oil producers understand that progress on climate would threaten the leading position of fossil fuels in the global energy balance.

While there is still no viable replacement for oil as a transportation fuel, the threat of climate change means that people are still going to seek oil substitutes no matter how low oil prices go.

The risk of being stuck with “stranded assets” may be small, but it exists. Moving forward, if oil producers see an uncertain future for oil it would make sense to emphasize market share, even at the expense of prices.

It was a Saudi oil minister, after all, who assured us that “the oil age will end long before the world runs out of oil.”

Jim Krane is the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy.