“As a result of the fall in demand and the rise in non-OPEC supplies, we recognised too late that oil was overpriced, that it had reached an unwarrantably high level, destroying the state of virtual equilibrium between supply and demand,” the Saudi oil minister told his audience.
The recent sharp drop in prices had not been good for either producers or consumers, he explained. “Neither … can plan with confidence for long-term energy production, investment and consumption … What the oil industry badly needs is price stability in the long term.”
Those words could have been spoken by the current oil minister, Ali Al-Naimi, who said something about price stability when he spoke to reporters in Mexico on Wednesday.
But in fact they were spoken by Naimi’s predecessor-but-one, Ahmed Zaki Yamani, in a lecture at Harvard’s John F Kennedy School of Government in 1986, just a few months before he was dismissed from the post he had held for 24 years (“Oil Markets: Past, Present and Future” Sept. 3, 1986).
As if to confirm the unchanging nature of Saudi oil policy, Naimi told reporters this week that policy had been constant for decades and would not change today (“Saudi’s Naimi rejects oil price war talk, seeks only stability” Nov. 12, 2014).
IT’S 1986 ALL OVER AGAIN
There are strong parallels between the price crisis in 1986 and the 30 percent decline in oil prices over the last five months. Then, as now, a prolonged period of high prices had damped oil demand, and brought forth a gusher of new supplies.
In the mid-1980s, the enormous increase in supply came from Britain and Norway in the North Sea, as well as the Soviet Union, the United States and China.
Yamani’s biographer Jeffrey Robinson cites an interview with a British newspaper in 1986 in which the minister warned: “Disaster lies ahead for which your country will bear the lion’s share of the blame” (“Yamani: the inside story” 1988).
In 2014, most of the increase is coming from onshore shale fields in the United States. Last week, U.S. production topped 9 million barrels per day for the first time since 1986, and before that 1973, according to the latest weekly estimates published by the U.S. Energy Information Administration.
As OPEC’s oil ministers prepare to meet in Vienna later this month, Saudi Arabia and the rest of OPEC face the same strategic dilemma as they did in 1986.
Cut production to support prices but at the cost of losing market share. Or leave output unchanged in the hope low prices will eventually force a reduction in supplies from some of the higher-cost and weaker producers in the market.
Then, as now, there are no good options for the Saudis, only less-bad ones, which might lessen the depth of duration of the pain for the kingdom and other members of OPEC as the market rebalances.
The shale revolution cannot be undone, any more than the development of oil in the North Sea and other hostile environments could be reversed in the 1980s.
AGENTS OF DISTURBANCE
Speaking in Mexico, Naimi told reporters “talk of a price war is a sign of misunderstanding, deliberate or otherwise, and has no basis in reality.”
Speculation by oil analysts and the media about the kingdom’s strategy for production and pricing is known to irritate senior Saudi policymakers. But the fault for destabilising speculation lies as much with the Saudis themselves as with the media and markets.
Oil policy remains almost totally opaque to outsiders, which is precisely how the government prefers to keep it. The kingdom publishes no reliable or detailed statistics on oil production, reserves, discoveries, exploration and drilling activity, customers or how the sets the prices for its oil.
Saudi Aramco and the petroleum ministry disclose only very limited and highly generalised information on their websites. Policymakers give almost no speeches or announcements outlining how they view market developments or about the country’s long-term production and investment plans.
Into the information vacuum, outsiders project their own views about what the kingdom is doing, drawing an exasperated response from senior officials.
In a typical interaction, Naimi was asked in December 2010 whether the kingdom would raise output in response to a rise in prices above the level previously identified as an informal target.
Naimi responded by blaming the media for being a destabilising influence: “Why do you want to disturb the market? The market is in balance … Leave the market alone.”
He went on to complain “You want something that we haven’t done yet. You want to cause disturbance in the market. The way you ask questions about price, about production, about supply, what you do is become an agent of disturbance in the market.”
There is nothing new about rumour and speculation filling the vacuum of real information about Saudi policy. In April 1986, the legendary New York Times columnist and former presidential speechwriter William Safire believed Saudi Arabia was deliberately crashing prices to harm Iran.
“My strategy is to produce and produce until the low prices bankrupt Iran,” Safire imagined Yamani saying (“Thinking Along with Yamani” April 2, 1986).
“Break Iran,” Safire went on. “The Persian menace is the single over-riding threat to the Arab world … With our very survival at stake, we are willing to suffer these falling prices because we know we are starving Iran’s war machine.”
Yamani later told his biographer that the imagined conversation had no basis in fact, and was just a bit of “journalistic wishful thinking,” a neoconservative pipedream.
More recently, some commentators have been reprising those earlier arguments, suggested Saudi Arabia is again content to see lower oil prices because it harms strategic rivals like Iran and Russia, or because it will put U.S. shale producers out of business.
These theories seem to have no more basis in fact than Safire’s armchair geopolitical strategising did almost 30 years ago.
Nonetheless, they point to a deeper and recurrent problem. Saudi Arabia provides so little information about its production, pricing and future investment strategy, and how it sees the oil market evolving in the medium term, that it positively encourages the destabilising speculation it says it wants to avoid.
The current system of off-the-record briefings to selected analysts and traders, which was explored recently by the Wall Street Journal, is mostly reactive rather than proactive, and fails to produce the intended consensus and informed discussion (“Oil price drop has Saudi officials divided” Oct 30, 2014).
It is time for the kingdom to embrace much more openness. There are some aspects of oil strategy that will always need to remain confidential owing to their commercial sensitivity. But much else could be usefully disclosed to clear up the myths and misunderstandings which now encrust analysis of the kingdom’s policy.
Saudi Arabia should take a leaf from modern central banks, which have revolutionised their communication strategy over the last two decades. Senior policymakers could outline their thinking in speeches and presentations, and far more information about routine matters like the setting of official selling prices could be disclosed on the websites of Aramco and the petroleum ministry.
None of this would encroach Saudi Arabia’s freedom to manoeuvre and set oil policy in its own interests. But by treating the media, analysts and customers as partners to be engaged constructively, rather than a nuisance to be kept at arms’ length, it would promote the sort of informed debate that Saudi policymakers have wanted for decades but mostly not achieved.