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Riyadh found a way to raise oil prices: will it last long?

Saudi Arabia is satisfied with the current oil prices and will test new technologies to push them even higher. It seems that for this purpose, the Saudis are even going to use their women, whom they recently allowed to drive cars.

It is natural that the biggest oil producer wants oil prices to be high. Almost 90% of Saudi Arabia’s budget consists of oil revenues. Consequently, the last two years’ decline in oil prices has resulted in a 13% annual drop in the country’s GDP. The OPEC output cut deal has not given the desirable result: it has not caused a jump in oil prices. The key problem here is that oil producers have not cut their exports by as much as they have cut their outputs. Some of them have just cut their domestic consumptions but instead they have boosted their exports. Some producers have even used their reserves for this purpose.

“As a result, the distribution of the benefits produced by the OPEC deal has turned out to be not very fair,” says Vasily Tanurkov, Deputy Director of the ACRA Ratings.

In Saudi Arabia, the situation is the same: the cut in exports is not equivalent to the cut in production. But the Saudis have still recorded the biggest cut in production and have lost more than the other producers.

In Sept, they suggested cutting exports instead of cutting production. A few days ago, the Saudi Ministry of Energy, Industry and Mineral Resources said that in November the country is going to cut its exports by 560,000 barrels a day to 7.15 million.

Tanurkov expects this measure to be more effective.

But will it benefit Saudi Arabia? It will provided that that country boosts domestic demand and refining – something many other producers are not able to do, according to Igor Yushkov, senior analyst at the National Energy Security Fund. “If they do this, they will not have to cut their output,” the expert says.

The Saudis’ decision to allow their women to drive cars proves that they are considering this measure. According to Facts Global Energy, this decision will add 10% to the number of drivers in Saudi Arabia and 60,000 barrels to daily gasoline consumption. In the meantime, the Saudis are enlarging their oil refining and petrochemical companies and this is also expected to boost domestic demand. Saudi Aramco says that the Jazan oil refinery, to be commissioned by the end of this year, will need additional 400,000 barrels a day. After King Salman’s visit to Moscow, mass media reported that SIBUR of Russia is going to build in Saudi Arabia a petrochemical plant worth $1.1 billion.

But these measures will not work immediately, according to Yushkov, and Tanurkov is of the same opinion: “The short-term goal of Saudi Arabia’s recent decisions is to give Saudi Aramco access to IPO. Now that oil prices are going up, the capitals of state-owned oil companies are growing and this is a chance for their owners to charge higher prices for their shares.” Today, the cost of Saudi Aramco is estimated at $0.5 trillion-2 trillion, with the Saudis having plans to sell some 5% of its shares next year.

One more proof that the Saudis have short-term aims in view when trying to boost oil prices is that this year, their exports were lower than reported. So, this may be just verbal intervention – for it is not a fact that on Nov 30, OPEC members will approve the Saudis’ initiative to cut exports rather than outputs. OPEC has no illusions here. According to Tanurkov, even if the talks are successful, not all oil producers will be able to do what the Saudis suggest – for it is much harder to control exports than it is to control production. And if they fail to do this, the Saudis’ initiative will remain just verbal intervention and will produce just short-term effects.

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