Saudi Arabia according to popular wisdom is a Persian Gulf Arab state, awash in vast amounts of oil, with high levels of oil production and massive oil reserves yet under the desert sands. However, the truth may be completely different.
Within this context the Saudis are exploring the opportunity to sell their oil on more transparent exchanges in which they feel they have some logical control over production levels and pricing in relation to world demand, and also be paid in currencies outside the anemic US dollar. Such a mover would be a great influence on all of OPEC. This has crucial implications for the US as it could take oil trading from US exchanges and eventually outside the dollar as the currency of trade.
The Real Saudi Arabia
Saudi Arabia has generally had falling oil production since its all-time peak in 1980 of 9.9 million barrels per day (mbpd). Present Saudi production is probably around 9 mbpd. The big question: Is declining Saudi production because the desert kingdom is running out of oil, or a voluntary action to reserve oil for potential higher prices in the future?
Saudi exports make up a total of 7 mbpd – about 9% of world crude oil consumption (around 75 mbpd).
Some oil experts (like Matt Simmons) believe that Saudi Arabia is now beyond peak oil production, or very soon will be. The low quality crude oil (sour and heavy) coming out of Saudi Arabia would also suggest that its oil fields are approaching exhaustion.
Pursuit of New Trade Opportunities
In this context, the Saudis are now attempting to break loose from the pricing of their oil, linked to Western institutions’ mechanisms, like West Texas Intermediate (WTI), and New York Mercantile Exchange (NYMEX).
The Saudis, along with a growing number of countries and oil sector insiders, are weary of the dominance of these Western institutions, like WTI and NYMEX, which are heavily influenced by speculation in their pricing of commodities, and in this case crude oil.
In recent times some voices have suggested that the spike in oil prices, in July 2008 to $147 a barrel, was partly due to speculation, and deep positioning of speculators in derivative funds. Hence, the intense speculation, along with increasing demand from universalizing economic development (for example into China and India), pushed oil to a new all-time record. So the opaque vagaries of these western mechanisms are unpredictable and not as subject to market forces, of supply and demand, as they should be.
Saudi Arabia now attempts to withdraw association with these mechanisms and possibly align their oil sale and pricing with exchanges like the Dubai Mercantile Exchange, which reflects the market realities of supply and demand better than the western exchanges, which are subject to massive speculation (of course including derivates) (White, 2009).
This Saudi move probably is twofold: 1) to keep oil prices on the generally higher level and 2) to keep oil prices more stable and predictable. Thus the Saudis will feel some level of logical control over aligning their production with the world demand, and in so doing more definitively set prices based on market forces.
The anti-Western mood in many areas of economy and politics is palpable. So this move with the Saudis will most probably be a weakening of these Anglo-Saxon commodity exchanges. Surely Venezuela, Iran and Iraq would be candidates to follow suit. But a string of other oil producing nations, like other Persian Gulf Sates of Kuwait and Abu Dhabi, African oil producing countries, and eventually Eurasian Russia, could get aboard the Saudi move when they see alternative exchanges give more realistic, predictable and stable prices. Even further, the Saudis have massive influence in OPEC, and so the way the Saudis go for selling oil on the world market, would surely indicate the route that OPEC would be expected to go.
In early November the Saudis took the step and adopted the London based Argus U.S. Sour Crude Index and since then major oil exporters in Latin America and the Middle East have expressed strong interest in switching the basis of their oil prices to Argus.
The Saudi move is an attempt to realign the world oil market from frustration with WTI, and so it is expected that many other sour crude exporters will follow the Saudi move. The WTI could become increasingly irrelevant in world oil trade (Campbell, 2009).
The Chief Executive Officer of Saudi Aramco (the Saudi National Oil Company) Khalid al-Falih said that “The Argus index was a solution … we believe it is good for our customers, it’s good for us, it’s transparent and will solve the problems that we will see in the future” of aligning price with current market forces (Shamseddine, 2009).
Implications for the US
Of course bypassing the increasingly despised and emaciated American dollar will also be inextricably tied in with these moves to flee the American exchanges. A more stable currency would be desired to trade in oil, and that just could be the rising “new boy on the block” – the Euro.
Saudi Arabia may be followed by many other countries and this may mean that the USA will fall into a trend in which increasingly international trade will be carried out by completely side-lining the US. This could mean that US prestige and influence become incidental. Even more, eventually the US may not be able to easily buy on international markets (as the US$ will be unacceptable) and so commodities like oil could become unobtainable. As two thirds of oil consumed in the US is imported, imagine what the dramatic effects will be.
So in conclusion, Saudi Arabia, probably in declining oil production, wants to control their oil selling price as best they can, and even get the highest realistic prices possible in the last decade of their status as an oil exporting nation. They have decided that a more transparent and less speculated exchange is the solution. And as other nations follow, this all fits in with the dramatic economic and political decline of the USA, and its once mighty dollar. Future implications are dramatic as Americans eventually may not be able to find sources for oil imports, and even possibly other commodities, unless payment is make outside the US dollar.
Campbell, R. (2009) Major oil exporters eye Argus switch, Reuters, 5 November, Major oil exporters eye Argus switch
Shamseddine, R. (2009) Saudi switch to Argus due to price volatility, Reuters, 8 November, Saudi switch to Argus due to price volatility
White, G. (2009) Do Saudis have the clout to destroy NYMEX? Telegraph.co.uk, 1 November, Do Saudis have the clout to destroy NYMEX?