Saudi Arabia shelves oil production expansion plans, raising questions on future demand

Saudi Arabia's unexpected decision to abandon plans to increase its oil production capacity by 8 per cent to 13 million barrels a day by 2027 has sparked speculation about the kingdom's outlook on future oil demand.

This is based on a Bloomberg report.

The announcement from state-run Saudi Aramco has fuelled discussions about whether Riyadh is growing more pessimistic about oil consumption amid the global shift towards low-carbon energy.

While concerns about demand are part of the equation, another significant factor is the competition from rival oil producers, particularly US shale.

The lack of a detailed explanation from Saudi Aramco regarding the shift in production plans has led to speculation within the industry.

Some experts believe that Riyadh's decision is not necessarily permanent shelving but a delay in upstream expansion plans, possibly due to concerns about softer oil balances in the coming years.

Bob McNally, President of Rapidan Energy Group, suggests that Riyadh is responding to the challenges posed by increased supply outside the OPEC+ alliance, indicating a strategic move to adapt to changing market dynamics.

The surge in production from rival suppliers, particularly US shale, has been a persistent concern for Saudi Arabia and its OPEC+ allies.

The shale oil revolution, which began around a decade ago, had a profound impact on global oil markets, leading to a significant drop in crude prices.

Despite the initial retreat of shale drillers during the COVID-19 pandemic, they have staged a comeback in recent years, contributing to record-breaking American output exceeding 13 million barrels a day.

The resilience of shale, coupled with increased production from other nations like Brazil and Guyana, has created a scenario of plenty in the oil market, impacting prices and influencing strategic decisions by major oil-producing nations.

While Saudi Arabia's decision has been associated with global oil market trends, domestic factors are also in play.

The kingdom is expected to face a budget shortfall of about 4.3 per cent of GDP in 2024, with funding requirements exceeding $46 billion.

Economic diversification initiatives, championed by Crown Prince Mohammed bin Salman, involve substantial spending on tourism, sports, and other projects. Aramco, being 98 per cent state-owned, pays significant dividends to the government, even with production cuts.

Abandoning the expansion plans to reach 13 million barrels a day could alleviate budgetary pressures on Aramco by reducing annual spending by approximately $5 billion, providing financial flexibility amid economic challenges.

(With inputs from Bloomberg)