Saudi Arabia is the world's largest exporter or crude oil, with the country exporting 68% the product to the Asian market. The nation enjoys a market share of 40%, enabling the government to fund a significant proportion of the budget from oil revenue. Consequently, Saudi Arabia was able to accumulate vast financial reserves in the years preceding the current low oil-prices when the price per barrel stood at $120 (Baumeister, & Kilian, 2016). However, the state of affairs has changed in the last couple of years following the drastic decline in oil prices. As a result, the country has experienced budget deficits and liquidity challenges, although that is not the official government position on the issue. This research paper aims to find out if Saudi Arabia is back in the oil market share game in its effort to protect its market in the regions it exports most of its oil products. The paper also delves into how other players in the industry have hampered the country’s endeavors to retain its oil market share.
Saudi Arabia has made a substantial investment in the oil sector over the years as a prudent measure to enhance efficiency. The country has relatively high quality oil fields in comparison with most of its rivals in the oil sector. Due to the dwindling oil revenues occasioned by the decreased prices of the crude oil, OPEC members have been compelled to develop strategies in an effort to retain or improve their market shares (Griffin & Teece, 2016). In spite of the enormous investments and increased efficiencies that Saudi Arabia has made in the oil sector, it faces stiff competition from rivals such as Iran, Iraq, and Russia. Available customs data shows that the Saudi Arabia market share increased in 2015 although it was still lower than in 2013 (Baumeister, & Kilian, 2016). The collapse of the oil market in 2014 occasioned the state affairs in Saudi Arabia.
The year 2014 marked a sharp decline of the oil prices from a high of $115 per barrel to $30 in January of 2016.The current prices stand at $40, per barrel (Baumeister, & Kilian, 2016). The scenario is attributed to the increase in the global supplies, mainly the USA shale boom. As a result, Saudi Arabia has made deliberate efforts to stabilize world crude oil prices due to the fact that the country relies hugely on oil to fund its budget. For example, the state reached a provisional agreement with Russia to cap production, which would, in turn, stabilize the prices. However, the effort has not borne any results leading to the current market share game (Brown, & Yücel, 2013). Pundits in the industry allude to the fact that it is unlikely that the crude oil prices would bounce back to $100 anytime soon. According to the experts in the sector, a lot of advances have been achieved in the non-fossil technology which has reduced consumption of oil. Further, professionals and experts in the sector agree that the current oil prices cannot support countries that rely entirely on the commodity as sources of revenue.
The Saudi Arabian government is concerned that it has recently suffered budget deficits leading to borrowing from banks as a measure to fill in the gap. Despite the fact the government uses future production as collateral to acquire the loans, it is essential to point out that the country enjoys an excellent credit rating by international lenders such as the World Bank and hence accessibility to loans is currently tenable. It is apparent that the move is not sustainable, and hence the government has devised new measures to cope with the crisis. It is essential to acknowledge that the crisis might persevere for a long period and short term measures need to be reinforced with long term measures to ensure that an economic crisis and slowdown is not experienced.
The $30 per barrel prices reported by Brent Crude in January of 2016 sent shock waves among the OPEC members (Baumeister, & Kilian, 2016). Although Saudi Arabia was worst hit due to its over-reliability on the commodity as a source of government revenue. According to the Saudi Aramco CEO, Amin Nasser, the current market prices are severely hurting the oil-producing countries and urgent measures are necessary to alleviate the issues in the sector. However, the head of the state-controlled oil giant has put on a brave face and refuted reports that the country is employing market share games to retain or increase exports to major destinations around the world. The country exports to the Asian market consist of 68% and hence it is only right if the state adopts efficient strategies to retain the market and shield the competition posed by the main rivals. One of the measures that the nation has taken is the reduction of prices to major customers in Asia, mainly India and China (Brown, & Yücel, 2013). The country is concerned that its primary rivals are performing much better regarding penetrating the lucrative Asian market.
Although Saudi Arabia’s exports to India and China have increased in the recent past, so are the exports from other countries such as Russia and Iraq. Despite the increased amounts of exports, the total percentage of exports has reduced, leading to the deliberate efforts to manage the situation. For example, in the first half of 2016, China, which is the country's major importer of crude oil, imported 1.061 barrels per day (BPD) in comparison with 1.064 in the same period in 2015 (Baumeister, & Kilian, 2016). The purchases by the country only recorded an increase of 0.24% in the first half of 2016 to reach 26.455 million tons. The decrease in the market share is attributed to significant factors at play in the oil market and the increased production by Russia is among the leading factors. The decrease in the market share has led to a rethinking of the strategies aimed at winning the market share for the country.
It is apparent that the market share in the country has reduced compelling the government to create deliberate measures to ensure effective management of the situation. Furthermore, Saudi Arabia's crude oil export to China consisted of 14.2% of the country's imports compared to 16.2% in the same period in 2015 (Baumeister, & Kilian, 2016). The glaring disparities have sent a warning to the country's administration leading to stringent measures to cope with the current prices. Apparently, Saudi Aramco lowered the official selling price (OSP) for Arab Light grade by a $1.30 margin to the Asian customers as a short-term effort to protect the market share. However, pundits in the sector have indicated that the measure may not have effective implications for the industry as other players may introduce counter strategies. The changes in the global oil market are long term in nature and the increasing focus on renewable energies will continually decrease the demand for fossil fuels. For this reason, there is a need for the country to formulate new economic policies that will encourage diversification and reduce reduce the overreliance of the country to oil products.
The Russia factor is particularly quite perturbing as the country has substantially increased its production, which has culminated in increased exports to China. For example, the country's market share in China has grown from 11.9% to 14.1% in the last one year (Brown, & Yücel, 2013). Although Saudi Arabia's export to India increased from 765,600 barrels per day to 828,500 barrels per day, in the last one year, Iraq's exports to the country has also increased. The consequence of the increased exports to the Asian countries by major rivals has compelled Saudi Arabia to offer discounts to slow down the increasing influence. Apparently, the country has engaged in more market share games than ever before. The challenge is severe while the future of the oil market is uncertain in the face of the dwindling fortunes. Most experts have alluded to the fact that the diversification of the Saudi economy is not an option in the short and long term and hence expect the country to employ more pricing tactics in a bid to protect its market territory.
Apart from the Asian market, the Saudi Arabia's South African market has also shrunk in the face of the current market glut. For example, the market share to South Africa has reduced from 53% to 22% within a one year period (Baumeister, & Kilian, 2016). The decline has been attributed to increased productions by Nigeria and Angola which has seen their crude oil exports to South Africa improve drastically in the last two years (Hallwood & Sinclair, 2016). Consequently, Saudi Arabia is concerned that efforts to recapture the market must be strengthened as there is an oversupply of crude oil in the market. Endeavors by OPEC members to re-balance demand and supply have not been fruitful so far. The push and pull factors in the global market share of oil products have significantly increased and various players and individual countries have employed various tactics.
Another attempt made by the Saudi government is to eradicate the effect of US shale industry. According to the government representatives in the country, the US has contributed to the current imbalance in the market. Most of the available customs data support the claim, as the US output has been increasing since 2014 (Baumeister, & Kilian, 2016). The data show that the US crude oil production increased by 4 million barrels per day, which is almost triple, the growth in Saudi Arabia. Other notable output increases were in Canada, Iraq, and Russia. Further, the Saudi attempted to increase their shipments to the US, but the efforts have been thwarted by the increased productions by America. The significant reduction in demand from the US and various other countries has prompted the country to establish new strategies of enlarging its market share. Further, the country need to re-evaluate its economic structure and policies focusing on the diversification of the economy, with an aim of reducing it reliance on oil.
However, Canada has an effect in reducing the US crude oil import from the Saudi Arabia as it has steadily increased the export to the US market. For example, Canada's export to the US has increased since 2009 and currently stands at 306,000bpd which has an enormous impact on the Saudis market share. It is important to mention that despite the shaky fiscal situation being experienced by the Saudi government, the country’s oil exports stand at 7.3 million barrels per day (Brown, & Yücel, 2013). Financial experts allude to the fact that the break-even oil price for Saudis stand at $49 if the reserve of 183 billion riyals is used and $67 if the fund is used, which still leave the Saudis in a sound financial standing compared to the rest of the world. The increased export of oil products by the US from Canada can be associated with the reduced transport costs since the distance is shorter as compared to exports from Saudi.
The world oil crisis has led to economic turmoil in Saudi Arabia, forcing the government to come up with measures to counter the turbulence in its financial sector. Due to the cash shortage that the country is experiencing, the government has withdrawn its deposits from the banks to fund the budgetary expenditures and ease the deficits. The move has created a shortage in the bank reserves, reducing the capacity of the banks to be effective in service delivery. The Saudi Monetary Agency (SAMA) which is the country's central bank acknowledges the immense challenges that the financial institutions in the country are experiencing. The central bank has suggested a $4 billion loan facility for the country's banks to assist them to overcome the liquidity challenges encountered. The challenges facing the country’s primary sector have encouraged an alternative approach towards the management of the economy through encouragement for diversification. If the country continues borrowing from the financial institutions, the cost of credit will increase, which will be counterproductive because private investors will be discouraged to take loans.
Reliable sources in the country indicate that the credit will be extended to the banks at discounted rates as a short-term measure to weather the current financial storm in the country. The move is also aimed at increasing the banks’ capacity to lend to customers to enhance investments and also contribute to the diversification of the economy to stimulate growth. Other measures introduced by SAMA are the reduction of the reserve requirement ratio, while at the same time increasing the loan-to-deposit cap so that the banks have more money at their disposal to lend (Brown, & Yücel, 2013). The loan facility offered by the central bank is based on the individual bank's financial statements to ensure that none of the financial services are hampered. The strategy is important to ensure the availability of funds to private investors in the country and prevent a slowdown of the overall economic development in the country.
As a conclusion, the Saudi government has engaged several measures in an attempt to retain its share of the oil market. It has mobilized OPEC members such as a Russian to reduce output, but the effect of the shale boom has been significant in hampering supply-demand balance. The Saudis have employed a pricing discounting measure to its customers in Asia, mainly India and China, but the move has not slowed the increase in exports to the continent from the rivals. Whereas the Saudi government is in a relatively stable financial position, it has been forced to come up with fiscal measures geared at protecting its banking industry to cushion businesses from the liquidity crisis experienced. Consequently, the Saudi central government has initiated a lending plan to banks so that they can stabilize their cash flows occasioned by massive withdrawals of government deposits. The move has created a $4 billion loan facility to the banks, based on the strengths of their balance sheets. Despite the aggressive strategies that the country continues to employ, the production and decisions of other oil producers would retain significant influence on the proportion of the Saudi world oil market share.
References
Baumeister, C., & Kilian, L. (2016). Understanding the Decline in the Price of Oil since June 2014.
Brown, S. P., & Yücel, M. K. (2013). The shale gas and tight oil boom: US states’ economic gains and vulnerabilities. Council on Foreign Relations
Griffin, J. M., & Teece, D. J. (2016). OPEC behaviour and world oil prices. Routledge.
Hallwood, P., & Sinclair, S. (2016). Oil, debt and development: OPEC in the Third World. Routledge.
