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The crucial position that Saudi Arabia has in global oil markets cannot be overstated. In 2019 its proven crude oil reserves stood at 297.6 billion barrels, representing 17 per cent of the world's total. In the same year Saudi Arabia produced 11.8 million barrels per day (mb/d) of crude, blended, and unblended condensates, and natural gas liquids. The country produces a wide array of crudes, ranging from Arab Super Light all the way to Arabian Heavy. Despite rising domestic demand in the past few decades, Saudi Arabia exports the bulk of its crude production and thus has a dominant position in international trade. It is the only country that has an official policy of maintaining spare capacity that can be utilized within a relatively short time at a low cost. Saudi Arabia's reserves are also among the cheapest in the world to find, develop, and produce. In contrast to some neighbouring countries and other OPEC members, such as Iran, Iraq, Libya, and Venezuela, Saudi Arabia has not experienced conflict or political instability and has not been subject to international sanctions. It has thus been able to invest heavily in its energy sector and integrate the upstream sector with refining and downstream assets, both in the kingdom and overseas. The oil and gas sectors are also heavily integrated, given the large volumes of associated gas produced. Saudi Arabia also has also a dominant position in OPEC and historically the organization's key decisions have been shaped by the kingdom, either those related to cutting output to balance the market or increasing output to offset output disruption within OPEC and elsewhere. Although Saudi Arabia's output has not been impacted by political or military shocks it has nonetheless been highly variable reflecting the kingdom's flexibility to increase and decrease output in response to shocks. Given its size and large margins, the oil sector also plays a key role in the Saudi economy. Despite new revenue sources, the government remains highly reliant on oil revenues for its ...

While playing a minor role in the 1970s, Saudi Arabia's gas sector has witnessed major transformations that have placed it at the centre of the Kingdom's development strategy. In a recent speech, Saudi Aramco President and CEO Mr Khalid al-Falih stated that 'the establishment of infrastructure for the gas industry serves as the basis for achieving the goal of economic diversification and provides the vital life blood for the industrial cities of Jubail and Yanbu' and most recently Rabigh'. The policy of providing cheap natural gas prices is considered by many Saudi policymakers as central to the success of the diversification strategy and to enhancing the Kingdom's global economic competitiveness as well as key for long-term political and social stability. While past policies have been successful in increasing the importance of natural gas in the domestic energy mix, they have posed some significant challenges to the current economic development strategy. These include the challenges of securing gas supplies to meet the rapid rise in domestic gas demand and reassessing the current gas pricing policy to reflect the rising marginal cost and opportunity cost of utilising gas reserves. It is now evident that the era of low-cost gas production, specifically gas associated with oil production is over. There are increasing signs that the current strategy based on (i) cheap domestic gas prices (ii) a policy of not exporting or importing gas; and (iii) meeting the rapid growth in domestic demand through increasing the pace of exploration and exploitation of domestic gas reserves is facing some serious strains. Policies pursued to deal with these strains, including doing nothing, will have wide implications not only for the future dynamics of the gas and oil sectors in the Kingdom, but also for the wider economy and the longterm sustainability of Saudi Arabia's industrialisation and development path. They also have implications for global energy markets. According to Saudi Aramco 2007 Annual Report, by meeting domestic ...

The main purpose of this report is to analyse the main features of the current crude oil pricing system; to describe the structure of the main benchmarks currently used namely Brent West Texas Intermediate (WTI) and Dubai-Oman; to clearly identify the various financial layers that have emerged around these physical benchmarks; to analyse the links between the different financial layers and between the financial layers and the physical benchmarks; and then to evaluate how these links influence the price discovery and oil price formation process in the crude oil market. The report finds that the assumption that the process of identifying the price of benchmarks in the current oil pricing system can be isolated from financial layers is rather simplistic. The different layers of the oil market are highly interconnected and form a complex web of links, all of which play a role in the price discovery process. The report also calls for broadening the empirical research to include the trading strategies of physical players; any analysis limited to non-commercial participants in the futures market and their role in the oil price formation process is incomplete. The report also emphasises the distinction between trade in price differentials and trade in price levels and finds that the level of the oil price, which consumers producers and their governments are most concerned with is not the most relevant feature in the current pricing system. Instead the identification of price differentials and the adjustments in these differentials in the various layers underlie the basis of the current oil pricing system.

We analyse the oil contracts and fiscal terms used by North African countries (Algeria, Libya, Egypt and Sudan) and the evolution of foreign oil companies' involvement in their oil sectors. Although the relationship between foreign oil companies and the governments of North Africa has witnessed major transformations over the years and has taken different shapes across countries depending on country-specific factors, there are some important similarities with regards to the importance of foreign investment. North African countries' oil sectors are still heavily reliant on foreign oil companies and this reliance is likely to increase further if they are to meet their ambitious expansion plans. The recent rise in oil prices and the limited opportunities available elsewhere meant that foreign oil companies had to deal with more confident and assertive governments that are demanding a higher stake in the oil rent. The effectiveness in which governments and foreign oil companies adjust to this new reality will determine the extent and the pace of the future development of these countries' oil sectors.

During the 1980s and 1990s, energy security declined in importance as oil prices fell and spare capacity stood at high levels. This was reversed in the decade that followed and once more energy security became a priority in policy agendas of most oil-importing countries. High oil prices, threats of terrorist attacks, instability in many oil-exporting countries and the rise in so-called 'oil nationalism' have raised serious concerns about the security of oil supplies. In the background, there are fears that the world may be running out of oil with many observers predicting an imminent oil supply crunch (Campbell and Laherrère, 1998) and raising doubts about the size of proven oil reserves in the Middle East and elsewhere (Simmons, 2005). These doom-laden predictions about the availability of oil supplies and the size of reserves are gaining popular credence at times when oil market conditions are tight. Many international agencies, such as the Energy Information Administration (EIA) and International Energy Agency (IEA), are also predicting a healthy growth in global oil demand in the next 20–25 years, driven primarily by high growth rates of non-OECD Asian economies.

The future fundamentals of the oil market cannot be more uncertain. On the one hand, many analysts claim that the world faces an energy crisis and that oil prices 'did not remain high enough for long enough to generate a solution to the energy problem, which has not gone away'. On the other hand, others argue that rather than just focusing on supply shortages and peak oil, the debate after the crisis should take into the account the possibility that oil demand may be peaking before oil supply. This (not widely held) view points to the convergence of three main drivers that would put downward pressure on oil demand in the long term: the new environment of high and volatile oil prices, higher efficiency gains in the transport sector, and government policies driven by concerns of energy security and climate change. A major challenge in forecasting 'medium-term' or 'long-term' fundamentals is that there are too many unknown variables such as developments in technology in the transport sector and in oil extraction, change in consumer behaviour, and the impact of energy and climate change policies, among others that can play an important role in shaping these future fundamentals. The wide uncertainty surrounding the oil market, especially in the aftermath of the financial crisis, however did not prevent many analysts from making predictions that market fundamentals are likely to tighten in the future. These predictions are based on three main pillars: (1) a very limited growth in non-OPEC supply due to peak oil and/or over-ground constraints such as geopolitical factors and hardening fiscal terms; (2) a slowdown in investment in OPEC countries due to a variety of factors such as geopolitical and the incapability and/or unwillingness of these countries to invest in the oil sector in the presence of large spare capacity and large demand uncertainty; and (3) a rapid growth in global oil demand fuelled mainly by non-OECD countries. The effects of these predictions are far from neutral. They can shape market outcomes, ...

Since the 1973 oil price shock, the history and behaviour of the Organization of Petroleum Exporting Countries (OPEC) have received considerable attention both in the academic literature and in the media.1 Many conflicting theoretical and empirical interpretations about the nature of OPEC and its influence on world oil markets have been proposed. The debate is not centred on whether OPEC restricts output, but the reasons behind these restrictions. Some studies emphasize that production decisions are made with reference to budgetary needs which in turn depend on the absorptive capacity of the domestic economies (Teece, 1982). Others explain production cuts in the 1970s in terms of the transfer of property rights from international oil companies to governments which tend to have lower discount rates (Johany, 1980; Mead, 1979). Others explain output restrictions in terms of coordinated actions of OPEC members. Within the literature, OPEC behaviour ranges from classic textbook cartel to two-block cartel (Hnyilicza and Pindyck, 1976), to clumsy cartel (Adelman, 1980), to dominant firm (Salant, 1976; Mabro, 1991), to loosely co-operating oligopoly, to residual firm monopolist (Adelman, 1982) and most recently to bureaucratic cartel (Smith, 2005). Others have suggested that OPEC oscillates between various positions but always acts as a vacillating federation of producers (see for instance Adelman, 1982; Smith, 2005). The existing empirical evidence has not helped narrow these different views. Griffin's (1985) observation in the mid-1980s that the empirical studies tend to "reach onto the shelf of economic models to select one, to validate its choice by pointing to selected events not inconsistent with model's prediction" still dominates the empirical approach to studying OPEC behaviour and its pricing power.

During the period 2002 to 2008, the oil market experienced a sustained increase in prices with the annual average price rising year-on-year for seven consecutive years. This boom, however, ended with a spectacular collapse towards the end of 2008. These sharp price movements captured public and political attention and raised concerns within both major consumers and producers about the adverse economic, political and social consequences of such violent price movements.

The proposal for a crude oil price band, revived by the Indian delegation during the Jeddah Meeting in July 2008, seems to be gathering support. The French president Nicolas Sarkozy and the UK Prime Minister Gordon Brown urged 'oil producers to agree a target price range, based on a clearer understanding of the long-term fundamentals'. In a joint article in the Wall Street Journal (8 July 2009), the two leaders gave an indication of what the upper and lower band should reflect, arguing that 'the world's economy is still reliant on secure supplies at prices that are not so high as to destroy the prospects of economic growth but not so low as to lead to a slump in investment, as happened in the 1990s'. The proposal for a band for oil prices has also received support from a few oil exporters such as Venezuela. These new calls for a price band represent an underlying change in governments' views about the process of price formation in oil markets. The sharp rise in oil prices in 2008 has raised concerns about the role of non-fundamental factors (mainly speculative activity in the futures markets) in the determination of the oil price. They have also raised the issue of whether importing and exporting countries have a role in reducing volatility in oil markets. An underlying theme is that oil price volatility is undesirable since it increases uncertainty, which hampers economic growth and undermines investment in the oil sector. Also by increasing uncertainty, volatility in oil prices could derail investment in alternative energy sources. Finally, there are fears that speculative activity can cause oil prices to overshoot and may choke off economic recovery.

The sharp drop in the oil price between June 2014 and January 2015 turned the world's attention to Saudi Arabia's role in the oil market and the determinants of its oil output policy. Initial hopes that Saudi Arabia would come to 'rescue' and 'balance' the market and put a floor under the oil price were replaced by stories of 'price wars' and 'conspiracy theories' aimed at pushing prices down to achieve some wider geopolitical objectives. This raised a set of fundamental questions: has there been a shift in Saudi Arabia's oil policy? And if the answer is yes, what are the implications of this shift in policy on the short and long run dynamics of the oil market? Has the role of 'swing producer' shifted from Saudi Arabia to the US shale producers? Is Saudi Arabia still relevant in the 'new oil order'? This paper argues Saudi Arabia's oil policy should not be analysed in isolation of the evolution of global oil market dynamics. It is also fundamentally rooted and shaped by some salient features of its political, economic, and social systems. Given Saudi Arabia's multiple objectives, some of which are short term while others are long term, and also given the limited number of tools available to policy makers (essentially: adjusting output and signalling to the market in the short term, and determining the pace of investment in its energy sector in the long term), Saudi Arabia faces trade-offs with regards to its oil output decisions. One key trade-off is between the objective of revenue maximization vis-à-vis that of maintaining market share and production volumes above a certain level. With the advent of US shale, Saudi Arabia has entered uncharted territory where it is still learning about a new source of supply and its responsiveness to price signals, which has made the calculus of the trade-off more uncertain. It is in the context of 'second best', trade-offs, imperfect information, internal constraints, and wide uncertainty introduced by a new source of supply, that this paper attempts to explain the behaviour ...

Kuwait's domestic electricity and water sector has been in disarray for several years, struggling with fast-rising demand for several decades as a result of rapid industrialization, population growth, rising living standards as well as due to the artificially low utility prices set by the government. We use a model-based methodology to compare the current pricing scheme against an alternative where consumer prices are raised to market levels and consumers are on average compensated by cash transfers that do not distort their economic decisions. Our main finding is that a realignment of prices at or closer to the market price level confers a benefit on current and future generations of Kuwaitis, in terms of fiscal savings, that outweighs the impact of raising electricity and water consumer prices to market price levels. Specifically, in the market price scenario with consumer prices at about ten times current levels, there is a total fiscal cost of about one-third of the value of fuel input used in the power sector (or about 1.5 per cent of GDP), entirely due to the cash transfer. This, however, is just less than one-fifth of the fiscal cost of the current low-price regime, and in principle represents a massive saving. The net benefit of moving to market prices is 6.3 per cent of GDP. By implication, if it is judged that a cash transfer scheme, undifferentiated by usage, can help gain acceptance for the price reform, it is shown to be affordable. We also show that the shift to market pricing will be a more efficient route to achieving spare capacity in the electricity and water system.

On 9 October 2009, the Oxford Institute for Energy Studies held a one-day conference in Oxford on 'Oil Price Volatility: Causes and Measures of Mitigation Strategies'. The conference focused on three themes: the role of fundamentals and financial factors in explaining the recent sharp swings in oil prices and the marked increase in price volatility; an assessment of the plans and strategies currently pursued to dampen oil price volatility; and the potential measures that could be adopted to mitigate the impact of sharp swings in the oil price on the energy industry. The group of participants included key senior figures from government, oil companies, the financial industry, and academia. The conference was conducted under the Chatham House Rule of non-attribution. This note contains a summary of the proceedings.

The events that took place in the Arab world in the opening months of 2011 mark a watershed in the history of the Middle East and North Africa (MENA) region. Given the importance of MENA energy supplies in global economic terms, the political unrest witnessed by the region has caused widespread fears about the prospect of energy supply disruptions. With international oil and gas prices beginning to rise from 2010, there was serious concern among market and political actors that any further increase in prices would put at risk the fragile recovery of the global economy from the deepest recession in decades. This paper examines the significance of the recent Arab uprisings and their implications for regional and global oil and gas markets. It argues that, although markets were able to cope resiliently in the short term, there remains much uncertainty about the likely longer-term implications of the recent events.

While higher fuel specifications and regulatory changes in the bunkers market are most likely to have a big impact on long-term fuel oil demand, a structural shift of a similar magnitude on the supply side is already taking place, particularly in Russia, the largest exporter of fuel oil. The Russian government's firmly stated commitment to the regeneration of its country's refining industry and its determination to ensure that domestic demand for higher quality products is met would suggest that, although the exact timing of a reduction in fuel oil production may be unclear, a sharp decline in fuel oil exports by 2016 seems inevitable. We show that in the past, price relationships between high sulphur and low sulphur fuel oil and between heavy fuel oil and crude oil and diesel have been subject to structural breaks, but price movement did not increase or decrease without bounds as the refining industry continued to adjust to increasing demand for petroleum products and changing global demand patterns towards cleaner products. Looking ahead, as investment in refining capacity expands and as upgrading of refining units accelerates in Russia and elsewhere, price spreads are likely to exhibit similar behaviour to that in the past few years. This does not imply that structural breaks in the price relationships will not occur. For instance, governments' desire to implement more stringent requirements without ensuring that the refining infrastructure is ready for such a shift or delays in refining projects will most likely destabilise the behaviour of price differentials, though the timing and the nature of such potential breaks (abrupt of gradual) remain highly uncertain.

China has constituted the most significant source of the incremental growth in global oil demand over the last decade, adding around 5 million b/d between 2000 and 2012. This is expected to continue well into the future: the International Energy Agency (IEA) estimates that China will account for more than 40 per cent of the increase in oil demand to 2035. A big part of that growth story has related to diesel, which has assumed a growing importance in the energy production and consumption of the world's fastest growing emerging market economies. Fuelled by trade and investment, China's growth has strongly supported diesel demand over the last decade. The dominant position of diesel in commercial freight traffic, be it by truck or rail, has made it the fastest-growing demand component. In China, the government mandate requiring all trucks to be fuelled by diesel by 2010 simply accelerated the already rising momentum of diesel demand growth. Further, diesel demand received an extra boost from power problems that led to greater use of diesel as a back-up fuel. In 2004, 2008, and 2010, power shortages during the winter months together with periods of government power rationing (to achieve environmental targets) contributed to buoyant diesel demand. The heavy industrial and mining sectors –such as coal, ship building, steel, and cement – that rely heavily on diesel, boomed throughout the 2000s. It is thus hardly a surprise that diesel was the backbone of Chinese oil demand growth, to the extent that Chinese oil demand growth was synonymous with diesel demand growth.