Saudi Arabia's King Abdullah died Thursday night and, the next morning, oil prices rose. A delayed reaction to the launch of the European Central Bank's €1.1-trillion ($1.52-trillion) quantitative easing assault on deflation might explain the uptick, but markets generally don't do delayed reactions. More likely, it was a tentative bet by oil traders that King Salman, Abdullah's replacement, will end the oil kingdom's low-price policy so he can fatten up the treasury and unleash a social spending spree to buy favour with his people.
Bad bet. On Friday morning, King Salman, who is 79 and is Abdullah's half brother, said on Saudi TV that he will maintain the policies of his predecessor. Since oil production and exports dominate most aspects of Saudi policy, presumably he meant that Saudi Aramco, the national oil company, would not be ordered to pull back production to firm up prices. Brent crude prices retreated, and remain under $50 (U.S.) a barrel – a 55 per cent drop since June.
Alberta beware. Any sense that the Saudi low-price policy was devised as a short-term shock – a nasty little reminder to the world that reports of Saudi Arabia's waning oil power are vastly exaggerated – is vanishing. The high-cost Alberta oil sands are about to enter the house of pain, especially since it is now apparent that the Saudis are not just trying to damage U.S. shale oil production, but Canadian oil sands production, too. Perhaps even more so.
For the Saudis, the trouble with shale production is that it can reappear as quickly as it disappears. This isn't true of the oil sands, whose projects are well financed, well managed and resilient to short bouts of low prices. Unlike shale wells, they can't be turned on and off like a tap. If the Saudis truly want to punish Alberta for having audacity to grab so much market share in the United States at the Saudis' expense, they will have to keep the oil price down for years.
Abdullah had been ill for many weeks, perhaps months, suggesting that King Salman, when he was crown prince, was intimately involved with Oil Minister Ali al-Naimi's decision, revealed at November's OPEC meeting in Vienna, to keep OPEC production intact at 30-million barrels a day even though the planet was swimming in oil. Since then, the price has collapsed and some expensive oil projects around the world are being delayed, cut back or scuttled.
On Jan. 6, Salman read a speech on behalf of the ailing monarch that gave no hint that the Saudis were about to bend on the low-price strategy even though it means the Saudi government will run a budget deficit of almost US$40-billion this year. "These tensions aren't new to the market and we have 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.
Saudi Arabia is a family-run country and it doesn't look like the family is about to change direction on oil just because the patriarch was buried on Friday. As if to prove the point, King Salman, on his first official day on the job, made a few changes among the ministers' ranks but left Mr. al-Naimi in the oil portfolio. You can bet Mr. al-Naimi would have been tossed out of the palace if King Salman was convinced the low-oil policy would not help lift Saudi Arabia's oil market share in the United States and elsewhere or would put the Saudi treasury on a suicide run.
The Saudis are obsessed with market share, especially in the United States, which is still the world's biggest oil consumer. The problem for the Saudis is that American oil imports are plunging. That's because shale oil production is surging and a gusher of imports from Canada is filling U.S. pipelines. One in particular, the Seaway pipeline, is thought to have put the Saudis into a rage. The pipeline used to run oil north from the U.S. Gulf coast, home to a vast fleet of refineries, to Cushing, Oklahoma. The pipeline was recently expanded and reversed, meaning it is now shipping Canadian crude like mad from Cushing, which is tied into the pipelines that stretch into Canada, south to the Gulf.
Recent data shows that Saudis have reason to be upset. Based a four-week average, U.S. oil imports from Saudi Arabia were recently down some 700,000 barrels a day over a year ago, according to the U.S. Department of Energy (imports from Mexico, Iraq, Kuwait, Brazil and Venezuela were also down, but by smaller amounts). The big winner was Canada: U.S. imports of Canadian crude were up about 300,000 barrels a days.
Olivier Jakob of Switzerland's Petromatrix, one of the few energy research firms that called the price drop last summer, says the figures show it is Canadian crude that has emerged as the big threat to the Saudis in the United States. "Saudi Arabia, I think, is much more scared about Canadian oil coming down to the U.S. than about U.S. shale oil," he said in an interview. "With the Seaway pipeline starting to bring heavy Canadian crude to the U.S. Gulf, Saudi Arabia, Mexico and Venezuela will be under market share fear."
If Petromatrix is right, and the data suggests it is, the new Saudi regime will be in no hurry to make life easy for the Canadians, or any other high-cost producer, by cutting exports. The decision the Saudis will have to make is: How long should they keep prices down? The oil sands are long-term plays. A year of low prices would not put the oil sands' owners into a panic, but four or five years might. Can Saudi Arabia run high deficits for that long? King Salman has a formidable foe in Canada. Who will blink first?
Eric Reguly