Don't hold your breath for a Saudi-led OPEC push to cut output

By now, any scenarios in which Canada's battered economy is rescued by a sudden upturn in oil prices have largely disappeared from the conversation. All save one.

A hope that one sunny morning Saudi Arabia may wake up, realize the error of its ways, and decide to curtail production remains alive for the oil industry.

And why not?

A change of heart by the Saudis could send crude prices higher by $15 to $20 US a barrel in short order, offering some desperately needed breathing room to global oil producers groaning under the strain of job cuts and, for some, the threat of bankruptcy. At the same time, a rush of petro-dollars would transform the math on budget deficits currently being prepped by governments from Ottawa to Alberta and beyond.

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For beleaguered petro-nations and oil companies alike, the idea that a few officials in Riyadh could make things better overnight is a seductive thought. Reality, though, is rarely that cut and dried.

"There are few things in the market where you can have a single inflection point and everything changes right on that day," said Jamie Webster, senior director of global oil markets at consultancy IHS. "It's definitely something that everyone likes to talk about because it's enticing to think that your problems can be solved by one quick decision, but it's so unlikely that we don't spend a whole lot of time on it."

Saudis won't flinch

Saudi Arabia, to be sure, isn't enjoying what $30 US oil is doing to its finances, but even if prices dropped more than expected it doesn't mean the country will reverse course on its strategy.

The Saudis didn't detour from their historical role as swing producer for the global oil market on a whim. With a war chest of cash that still tops half a trillion dollars even after a year of low prices, neither desperate pleas from rival members of the Organization of the Petroleum Exporting Countries nor building pressures from inside the kingdom itself are enough to make them flinch now.

Painful as it may be to forego the billions that higher prices would bring, the Saudis know they're able to weather the hardship better than most. At the same time, factors such as the shale oil revolution are also demanding new tactics.

"They looked out there and they saw the shale production coming on like gangbusters and thought this is a real long term threat," said Michael Lynch, president of Massachusetts-based Strategic Energy & Economic Research. "It's maybe the most serious they've faced in the history of [OPEC]."

Unlike in the past, if Saudi Arabia were to curtail production, they know another country, whether Iran or the US, will step forward to fill the gap.

Rather than lose out on volume and price, the Saudis are content to pump as much as possible and see what the rest of the world might do about prices. For all the noise that OPEC members such as Venezuela are making about limiting output — chatter that Russia has recently joined — experience tells Saudi Arabia that other countries can't be trusted to follow through on any agreed upon production cuts for more than a short time.

The long game

Beyond the current preoccupation with market share, the Saudis also have their eye on the long game. Even as climate change becomes more of a factor for crude producers, the world, at least for now, still runs on oil. The Saudis would obviously like to keep it that way for as long as possible. 

While lower oil prices are putting the hurt on rival producers such as Canada in the immediate term, in the long run they also benefit the Saudis by delaying the development of alternative vehicles such as the electric car and pushing back the date that global oil demand eventually crests.

An increase in world oil consumption last year of 1.7 million barrels a day, the second fastest pace in a decade, shows how well the Saudi's strategy is already working on that front.

According to a recent report by the commodities group at Bank of America Merrill Lynch, if oil prices stay below $70 US a barrel, the world won't hit peak oil demand until sometime after 2040. Lower prices, the analysts explain, change the outlook for future oil demand in a number of ways including boosting the proliferation of cars in emerging markets, slowing the pace of fuel efficiency gains in new vehicles, and delaying the development of alternative vehicles such as the electric car.

At a conference a little more than a year ago the Saudi oil minister, Ali al-Naimi, flagged how great a concern the consumer part of the oil equation was becoming for the kingdom when he posed the question "is there a black swan out there that we don't know about which will come by 2050 and we will have no demand?"

If the answer to his query is yes, then low prices are the Saudi response to staving off that eventuality for as long as possible.

For high-cost producers the world over, including those in Alberta's oil sands, the consequences of that strategy become more evident with each cutback to capital spending and every time another project is shelved.

"Let me deliver some bad news for Canada," said IHS's Webster. "From Saudi's standpoint, they believe it makes a whole lot more sense for Canada to shut in [production] than for them to shut in."