Why Has Saudi Arabia Cut Its Oil Output?

on January 22, 2013 at 11:00 AM

The world’s most influential oil producer, Saudi Arabia, reduced its oil production towards the end of 2012, causing many to conclude the Kingdom sought to reinforce global oil prices, but the Internal Energy Agency has a different take.

Saudi Arabia had been pumping oil at 30-year highs for most of 2012, but cut back supplies by just below 300,000 barrels per day in December to 9.36 million b/d, the IEA said in its most recent Monthly Oil Market Report.

Many analysts and news agencies noted the cutback, proclaiming it was driven by price considerations, with the Saudis looking to ensure they received adequate revenue from oil exports to finance the government’s budget, a move Riyadh is widely believed to have made in the past.

“Market speculation was rife that Saudi Arabia reduced supplies in a bid to set a new price target of $110/barrel,” said the IEA.

IEA called this view shortsighted and reminded readers of the report that “Saudi Arabia has become its own single largest customer,” referring to the over 3.1 million b/d consumed domestically in refineries, power plants – many of which direct-burn crude – and desalination plants.

This considerable domestic oil consumption increase was a major reason behind the Saudi Gas Initiative, designed to discover and produce non-associated gas in the Kingdom that would be used for power generation, thus freeing up valuable oil for export. The Saudis’ non-associated gas ventures, though ongoing, have largely proved disappointing. This has contributed to the push towards developing renewable energy sources, including nuclear power.

The seasonal change in weather to cooler temperatures requires less air conditioning and therefore fewer barrels burned to generate power. “Crude burned at utility plants typically peaks in the May‐September period before starting on a seasonal downturn” the IEA said.

Additionally, decreased demand on behalf of domestic refineries and a major partially-owned plant in the US contributed to the supply reduction. “Lower output in recent months also reflects a seasonal cutback in demand by refiners for the country’s crude. Reduced output in December may also reflect lower‐than‐expected shipments to the US, where Aramco was planning to restart a new 325,000 b/d crude unit at its joint venture Motiva refinery in Port Arthur, Texas,” the report noted.