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The Oil Era Could End Soon

-By Mahmud Jega

If the analysis and opinion ventured by Saudi Arabian writer Nawaf Obaid in a March 20, 2020 article in CNN Business Perspectives is to be believed, then the oil era could be at an end for Nigeria very soon, no thanks to a strategic Saudi Arabian onslaught on the international oil market.

CNN described Obaid as a former Saudi Arabian government adviser, so it is not clear whether he was writing as a journalist or as a Saudi government propagandist. His article, titled Saudi Arabia just won control of the oil market, is a Doomsday scenario for Nigeria, which depends on crude oil exports for most of its foreign exchange earnings as well as most revenue for all three tiers of government.
According to Obaid, Saudi Arabia, which is OPEC’s de facto leader and its most influential member, decided after the latest OPEC meeting in Vienna, which ended in deadlock, to break its recent strategic oil partnership with Russia and adopt a new policy to maximize production levels. This led to the recent crash in oil prices, the biggest crash since 1991.

The Saudi move, he said, recalibrated global oil markets and gave the country long-term advantage. In contrast to its previous policy of managing global oil markets by altering production levels with the difficult cooperation of Russia, Obaid said Saudi Crown Prince Mohammed bin Salman decided to pursue a long-term policy that preserves and ultimately increases the kingdom’s market share. It could also signal the end of OPEC as a united functioning organization, this writer said.

Not only Nigeria, but most oil exporting countries, international energy companies and American shale producers are unhappy with the Saudi move, according to Obaid, because collapsing prices will drastically decrease their revenues and in some cases, force them into bankruptcy. Yet, the Saudis are pushing on with this move, first because it long ago invested in spare production capacity. Saudi Aramco, the state-owned world’s largest oil and gas company, spent over $35 billion since 2012 to maintain a 12 million barrels-per-day sustained production capacity with a 1.5 to 2 million barrels-per-day spare capacity cushion.

Now the Saudis intend to utilize this spare capacity, according to Obaid. Saudi Aramco will be pumping 12 million barrels of oil per day from April 1, 2020. 9.5 to 10 million barrels per day of that will be exported every day. Aramco intends to increase its output to 13 million barrels a day by next year, Obaid said. The Saudi goal is not only to overtake the world’s second largest oil producer, Russia, but to overtake the largest producer, USA, within two years. In the process, it will inflict serious, maybe even terminal injury on conventional as well as shale oil producers around the world.

Saudi Arabia can sustain this price war because it has the world’s lowest oil production cost, $8.98 per barrel. In comparison, US shale oil costs $23.35 per barrel to produce; its non-shale oil costs $20.99 a barrel to produce while Russian production costs average $19.21 per barrel, according to the Energy Information Administration. Saudi Arabia has 25% of the world’s oil reserves, is the world’s largest crude exporter by far, and has 70% of the world’s spare production capacity.
Then also, the Saudis have $500 billion in net foreign reserves, which was why the Saudi Finance Ministry believes, according to Obaid, that it can sustain oil prices falling as low as $30 per barrel on average for at least the next five years, with temporary dips as low as $15 per barrel. Imagine what they will mean to Nigeria’s public finances. The widespread belief here is that the current dip in oil prices is due to COVID-19, which we hope will be gone sooner or later. Even with that, the Federal and many state governments are slashing their 2020 budget projections. If Obaid’s assertions are to be believed, those cuts will be permanent.