OPEC refining Feb15

I was kindly invited last week to give a keynote address at the annual ME-TECH conference in Dubai.  Naturally, there was intense interest in my argument that oil prices were most unlikely to recover to the $100/bbl level.

Instead, I suggested they would likely return to their long-term historical average of $33/bbl (in $2014).  And I argued that this would be good news for the global and Middle Eastern economies.

The chart above highlights a key issue in my analysis.  Based on official OPEC data, it shows how:

  • OPEC’s own refining output grew 245% between 1980-2013, from 3.3 mbd to 8.1 mbd (blue area)
  • OPEC’s share of world refinery output grew as a result from 5.6% to 9.5% (red line)

This development highlights the change of direction underway in oil policy in key nations such as Saudi Arabia.  They now have a much greater stake in promoting downstream demand, in order to create local jobs in the region.

One key issue is that exports from this new refining capacity effectively increase OPEC’s total oil exports.  Commentators usually only focus on OPEC’s actual oil production.  Yet its exports of refined products are equally important to global oil supply and demand balances.

Even more important is the opportunity that new refining capacity provides to create jobs in downstream industries such as plastics and other value chains.  This is critical for social stability, as the Middle East is one of the few world regions with relatively young populations of median age 25 – 30 years.

Governments who wish to remain in power, know they have to provide jobs for these young people, or risk mounting social unrest.  And so whilst it may be more profitable to ship high-priced oil to markets in the US, Asia and Europe, job creation is becoming a more important priority.

Jubail refiningThus Saudi Arabia is in the middle of a major refinery expansion, as the picture on the right shows of the new Jubail refineries.  These add 0.8 mbd to Saudi capacity, with a further 0.4 mbd capacity planned at Jazan for 2017.  As Oil Minister Ali al-Naimi told the Wall Street Journal yesterday:

We are no longer limited to exporting crude oil.  This will make the kingdom one of the five largest countries in the world in terms of refined crude capacity and the second largest exporter of refined products after the US”.

In turn, this highlights a key rationale for Saudi’s market-driven pricing policy.  Not only does it have the lowest production costs in the world, and the largest oil reserves.  But it needs to maximise its refinery and downstream volumes to create jobs.

High oil prices do the opposite – they destroy demand.  Thus it should be no real surprise that, as I noted back in December’s pH Report, Naimi has made it very clear that in future, “the market sets the price”.

In my view, the various conspiracy theories that have been put forward to explain why Saudi encouraged oil prices to fall are wide of the mark.  Logic suggests that Saudi has little interest in trying to bankrupt Russia, or to close down US shale production.

Instead, it simply needs to maximise demand for its products in order to create as many jobs as possible, as fast as possible.