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In September 2019, the Saudis cut production by 5.7 million bpd after Iranian-backed militants in southern Iraq launched missile and drone attacks on vital Saudi oil facilities. Saudi Arabia’s Energy Ministry assured consumers that Aramco would restore its 12 million bpd by the end of the year. The announcement ignored the fact that it would take several weeks to assess the damage, let alone repair it. To honor its export commitments, Aramco bought Iraqi oil that had similar specifications to its own. But these supplies likely came from Iran, which smuggles its oil to the Basra region and rebrands it as Iraqi oil – meaning the Saudis likely rewarded Tehran for ordering its Shiite proxies to target Saudi oil installations.
In the second quarter of 2020, Aramco increased its production to 12.1 million bpd and nearly exhausted its oil storage tanks. More than two years ago, it announced that it would boost its maximum production capacity from 12 million bpd to 13 million bpd without specifying a target date – though it’s unlikely to happen before 2027. The problem is that Aramco’s current sustainable output is well below 12 million bpd, probably under 10 million bpd, because its spare capacity virtually disappeared even before Crown Prince Mohammed bin Salman launched his Vision 2030 initiative in 2016. The project seeks to diversify the Saudi economy, making it multi-sectoral with an emphasis on services and manufacturing. The National Renewable Energy Program strives to transform Saudi Arabia into a post-oil country by ensuring that renewable energy sources account for at least 50 percent of domestic consumption.
The formation of OPEC+ in 2016 ended the rivalry between producers and halted the oil glut – which had caused a 57 percent drop in prices between 2014 and 2016 – leading to a rally in prices that began in 2017. It also allowed Saudi Arabia to replenish its storage ranks. Still, the Saudis pumped 10.42 million bpd last month, representing an increase of just 60,000 barrels from May, despite mounting U.S. pressure to increase production capacity. And over the next six months, Saudi production will rise to 11 million bpd, a minor surge that represents the most Riyadh can do to stabilize the market and comes at the cost of draining its strategic reserves at home and abroad.
Given the uncertainties in the oil market, Saudi Arabia isn’t keen to increase its production beyond 12.5 million bpd. It wants to strike a middle ground between spending heavily on increasing capacity, which could be squandered if oil loses its strategic value, and reducing production, which could compromise its geostrategic significance. Aramco is investing more financial resources on infrastructure maintenance and adding more lateral wellbores than the expensive drilling of new wells. The UAE, which is rapidly diversifying its economy, plans on raising its maximum oil production capacity to 5 million bpd by 2030, contingent on investing $30 billion on infrastructure.
Saudi Arabia didn’t turn down Biden’s demands to hike production because he was critical of the kingdom during the presidential election campaign and refused to communicate with the crown prince over Saudi journalist Jamal Khashoggi’s murder. The reason it refused these calls is that Riyadh cannot increase production without draining its own stockpiles. Even if Saudi Arabia possesses significant spare production capacity, as it claims, it is bound to comply with the OPEC+ Declaration of Cooperation, which regulates members’ oil output and gives Riyadh more significant advantages than it would receive by complying with U.S. demands.
Biden’s Visit
On July 15, Biden will arrive in Jeddah from Israel. He hopes his visit will achieve a breakthrough in Middle Eastern relations by expediting Israel’s full integration in regional affairs, establishing a collective defense alliance, and increasing oil shipments from the Gulf Cooperation Council countries, namely Saudi Arabia and the UAE. But these expectations face a grim reality.
The 1945 historic meeting between U.S. President Franklin Roosevelt and Saudi King Abdulaziz aboard the USS Quincy in the Suez Canal established a unique partnership built on oil exports. The 1973 Arab oil embargo championed by King Faisal shocked the U.S. and led to a surge in oil prices. Since then, all U.S. presidents keen on keeping Saudi oil flowing have visited Saudi Arabia to maintain this precarious relationship, especially after Sept. 11 and the rise of Iranian expansionism. But Biden’s visit is unlikely to substantially change the current realities of the oil market or Middle East relations.
A few months ago, Salman responded to a question about whether Biden misunderstood him by saying it was “up to him [Biden] to think about the interests of America.” Observers thought he was referring to the U.S.’ reliance on Saudi oil output. More likely, he was referencing economic ties, military cooperation and arms purchases between the two countries, since Riyadh doesn’t have much more oil to offer than it’s already producing anyway. Biden understands this, but he’s still hoping Saudi Arabia and the UAE can help relieve the pressure on the oil market, since the sanctions on Russia will continue for the foreseeable future. He could expect to get a pledge of increased oil shipments starting in January, by which time OPEC+ countries will have met their commitments to the organization and can start rebuilding their production capacity.