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Saudi Prince’s Elevation Will Have Far-Reaching Consequences in Energy

Supporters say the 31-year-old prince will bring youthful energy and a fresh eye to the kingdom’s most valuable export, using it to help modernize and diversify the economy. Detractors, however, charge that he is inexperienced and prone to meddle, undermining experienced officials and making sudden public pronouncements.

“The problem is he is unpredictable, and it is not clear who he is relying on for advice,” said Paul Stevens, a Middle East energy analyst at Chatham House, a research organization based in London.

Here’s how Prince Mohammed’s rise may affect oil prices, global energy production and the sale of shares in Saudi Aramco:

The prospect of falling prices

Oil prices are around $ 45, continuing a slide after the news of Prince Mohammed’s promotion.

That is down 20 percent since mid-April, and well off the levels in 2014 of above $ 100 a barrel.

The main reason for the decline in prices, though, is that OPEC’s much-trumpeted production cuts seem to be having little impact on the persistent glut of oil for sale.

The higher prices resulting from OPEC cuts have resulted in increased production from shale oil producers in the United States and by other rivals, undercutting the cartel’s actions.

Oil Prices: What to Make of the Volatility

Over the last two and a half years, the oil industry experienced its deepest downturn since at least the 1990s.

Flip-flopping Saudi energy prices

Prince Mohammed has appeared to go back and forth on oil strategy.

He initially declared that prices did not matter. But when they fell to uncomfortable levels early last year, the prince backed production cuts by OPEC and other producers like Russia as a way to prop up prices.

The Saudis and OPEC may now be headed for another crunch, and there do not seem to be any good options.

Analysts say the most likely path is for the Saudis to persist with, or even deepen, production cuts to bolster prices and improve the environment for the Saudi Aramco I.P.O.

“We should be prepared for Saudi Arabia to do whatever it takes to keep the prices above” $ 50 a barrel, FGE, an energy consultancy, wrote in a note to clients on Wednesday. “If the I.P.O. is to go ahead, prices cannot go below” $ 50 a barrel, it added.

OPEC’s debate

The question is how long the Saudis can stick with a policy of reduced production if it does not result in higher prices.

In 2014, Saudi Arabia’s former oil minister Ali al-Naimi concluded that there was little point in OPEC restraining production because any cuts would just be replaced by producers of shale oil.

When prices fell below $ 30 a barrel early last year, Mr. Naimi and other officials began pursuing temporary production restraints to prop up prices.

So far, those cuts are credited with bolstering prices and supporting the revenues of producer countries. But falling prices could push Prince Mohammed to once again consider whether output constraints serve Saudi interests.

An I.P.O. dependent on oil prices

Prince Mohammed’s elevation gives him added authority to push ahead with his pet project, overriding the objections of traditionalists who argue that only the state should own natural resources like oil.

The Saudi Aramco offering is a key part of the prince’s overall blueprint for overhauling the economy and reducing its dependence on oil, a plan known as Vision 2030.

Ironically, though, the oil price may play a key role in the success of his ambitious undertaking: Buoyant prices would help raise more money through the I.P.O., and help attract investment to Saudi Arabia.

Source: NYT > World

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