Ali Jarekji / Reuters Near the Khurais oilfield about 99 miles from Riyadh, June 23, 2008.

Saudi Arabia's Oil Strategy in a Time of Glut

Why the Kingdom Wants to Pump More

The world is already awash in oil, and yet there may soon be more Saudi crude flowing to market. This month, just after scuttling a “production freeze” among major oil exporters, the Saudis fired long-serving oil minister Ali Naimi, who was a rare, reassuring fixture in the unpredictable oil market. Naimi had wanted to retire, but his support for the freeze contradicted the position of his superiors and probably hastened his departure.

Along with naming a replacement minister—Khalid al-Falih, the former CEO of the state oil giant Saudi Aramco—the Saudis also announced a significant shift in oil market strategy. The kingdom would not only maintain its brisk pace of oil production of 10.2 million barrels per day but increase it further. Amin Nasser, the current CEO of Aramco didn’t stop there. He said that the theoretical ceiling on Saudi oil production capacity—12.5 million barrels per day—could be expanded in the future.

In some respects, signs of the Saudis’ strategy shift were there all along: The country is locked in a battle for market share in the face of a U.S. shale boom, a re-emerging Iran, and a glut of non-OPEC crude. Longer term challenges, such as the threat of hitting a ceiling on global oil demand—perhaps in response to climate change—probably also shape thinking at Aramco headquarters in the eastern city of Dhahran. With 260 billion barrels of proven crude oil reserves still underground, the risk of stranded assets is a scary proposition in Saudi Arabia.

STRANDED FUEL

Saudi production decisions are subject to painstaking deliberation over the optimal pace for depleting the kingdom’s reserves. Aramco calibrates output from individual fields so that recoverable oil is exhausted gradually, over a minimum of 30 years. This has a constraining effect on the market. Since 2000, the kingdom’s output has hovered at about 13 percent of global supply, a self-imposed limit that has forced oil prices up. This has allowed higher-cost “fringe” producers to meet remaining demand with costlier

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