Saudi Oil U-Turn Stokes Doubts Over Future Demand

Saudi Arabia’s major reversal on plans to boost how much oil it can produce may spur doubts over the long-term health of demand.

State giant Saudi Aramco provided no rationale when it said Tuesday it would ditch efforts to reach capacity of 13 million barrels a day by 2027 and instead hold at the current 12 million.

The lack of guidance will inevitably feed into a skeptical narrative: that as the world transitions away from fossil fuels, an expansion by the biggest oil exporter is no longer necessary.

Riyadh is already keeping about 25% of total output in the ground as a result of cutbacks made with the Organization of Petroleum Exporting Countries and its allies. With so much capacity lying dormant, it may question the need to build more.

The International Energy Agency predicts that oil demand will peak this decade amid a switch to renewable energy and electric vehicles, though the Saudis and their partners have steadfastly disputed that prospect.

OPEC forecasts that demand will keep climbing until midcentury, and Saudi Energy Minister Prince Abdulaziz bin Salman has vowed to drill “every last molecule” under the kingdom’s sands.

Bullish oil investors would contend that Aramco’s pivot has other motivations.

It may be a warning to the IEA and consuming nations: perpetuate the rhetoric about the twilight of hydrocarbons, and investment will dry up and a supply squeeze will ensue. This could help bolster flagging sentiment in crude prices.

Or they may say that Crown Prince Mohammed bin Salman needs the cash that would have gone into expanding capacity for other endeavors. The kingdom has splashed on everything from futuristic cities to famous footballers, even as its economy contracts.

At the very least, Aramco’s move signals that the Saudis will persevere with an OPEC+ deal to cap production at 9 million barrels a day for some time — giving a positive boost to markets.

Nonetheless, it was Riyadh’s neighbor and fellow OPEC member the United Arab Emirates that brokered an accord at the COP28 climate talks last year to shift away from fossil fuels.

It may well be that the region’s view of global energy demand also is in transition.

—Grant Smith and Julian Lee, Bloomberg News