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Saudi Arabia’s Move to Cut Oil Production Would Continue for Years

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Image Source: Remco van der meer, CC BY 2.0

As part of the agreement it signed with the Organization of the Petroleum Exporting Countries (OPEC) in October 2016, Saudi Arabia has reduced oil production by 486,000 barrels per day, stabilizing oil prices at above $50 per barrel. Now, this move is said to continue for years to come.

There are a few factors that coerced Saudi Arabia to engage in this agreement. For one, it does not want to antagonize the new administration of US President Donald Trump by declaring a price war against American frackers. The country already learned in the past that it cannot end the fracking revolution in the US by doing so.

Also, there is the Aramco IPO grand plan, which includes selling the shares of the state-owned company to make the country’s economy less dependent on oil by 2030.

Moreover, there is the issue of major oil reserves becoming mature and new oil fields getting more difficult to come by, causing the country to run out of oil at a faster rate than previously thought. An excerpt from what Matthew R. Simmons in Twilight In The Desert: The Coming Saudi Oil Shock And The World Economy says:

“What we know about the Kingdom’s oil is pretty much what Saudi Aramco, the Petroleum Ministry, and the royal family want us to know.

“The ‘known facts’ about Saudi Arabia’s oil, then, are few and simple. In 2004, ‘proven oil reserves’ totaled 259.4 billion barrels, plus another 2.5 billion barrels in the Saudi-Kuwait neutral zone. If these proven reserve numbers are real, it means that Saudi Arabia’s oil will last another 90 years at the current production barrels per day.”

While we cannot tell exactly how long the country will run out of oil, Simmons entails that cutting oil production will surely stabilize prices, considering that the world economy can absorb the additional supply from frackers.

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