In mid-2008, with oil prices on their way to setting a record high of $147/b, OPEC kingpin Saudi Arabia faced a chorus of doubts about how much crude it was capable of producing. Some analysts even said the kingdom was pumping near its maximum volumes.
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To hear Ibrahim al-Muhanna tell it, those analysts were wrong, and the market is risking making the same mistake in 2022, as fears over shrinking Saudi spare capacity are dominating oil headlines.
"The market should not worry" about Saudi Arabia's ability to hike output to meet growing demand, he said in an interview with S&P Global Commodity Insights. "What's really good about Saudi Arabia is they have the system. The system meaning pipelines, storage, export facilities. When you have all these things, and of course good management, good engineering, you don't have any major problems [raising production]."
For more than 30 years, Muhanna's words have carried great weight in the industry, even though he was rarely named in the countless news articles he was quoted in.
Instead, the right-hand man to four of the kingdom's oil ministers was often identified as a "senior Gulf source," "OPEC delegate" or "Saudi official," in his role as briefer-in-chief to oil journalists around the world.
Officially a "senior adviser" at the Saudi oil ministry when he retired in 2017 to start his own consulting firm, Muhanna has now written a book, Oil Leaders: An Insider's Account of Four Decades of Saudi Arabia and OPEC's Global Energy Policy. It gives readers a peek behind the opaque curtain of Saudi oil strategy, with insights from his front-row seat at OPEC meetings, negotiations with oil company CEOs and audiences with kings, presidents and prime ministers.
It details, for instance, how in the midst of his re-election campaign in 2012, then-US President Barack Obama secretly called King Abdullah asking for help in lowering surging oil prices. That led Muhanna and oil minister Ali al-Naimi to hatch a plan involving higher Saudi exports but also a whisper campaign to hedge funds, banks, analysts and the media that the kingdom was willing to pump even more, if needed.
The gambit worked, oil prices came down, and Saudi clout was confirmed by the market.
Profiles in leadership
The book also contains Muhanna's assessments of political leaders involved in the oil market, ranging from Saddam Hussein (vain, belligerent and conspiracy minded) to Donald Trump (distrustful of international institutions, though eventually convinced to cooperate with OPEC).
And though written from Muhanna's Saudi perspective, the book does not shy away from close examinations of oil leadership within the kingdom, as well.
Naimi, for example, was by 2015 too inflexible in his ways after 20 years in his post, slow to adapt to the dynamism required by new Saudi Crown Prince Mohammed bin Salman and too mistrustful of the Russians from his previous dealings with them, Muhanna wrote. He also underestimated how resilient US shale producers would be to falling prices.
After a failed OPEC/non-OPEC summit in Doha in April 2016 aimed at reversing a two-year slump in prices, Naimi was relieved from his post and replaced by Khalid al-Falih, who a few months later helped broker the game-changing OPEC+ alliance with Russia in Algiers that still endures.
Oil Leaders is not a comprehensive history of the oil industry, but it does help illuminate the lessons Saudi Arabia, as the world's largest exporter of crude and primary swing producer, responsible for more than 10% of global supplies, has learned in wielding its power.
And that, in turn, contains parables for the current volatile market.
"We should be prepared for a lot of energy uncertainty in the coming decades, and the role of decision-makers, regardless of the direction the world might go, will be more important than ever," Muhanna wrote.
Today, the oil market is in crisis again.
Russia has incurred severe western sanctions over its invasion of Ukraine that aim to snuff out a major chunk of its oil exports, stretching a market that is seeing robust demand, though fears of a recession have recently weighed on prices.
Many members of the OPEC+ alliance are unable to produce more crude, leaving Saudi Arabia and the UAE holding all of the world's spare capacity – though how much remains a major question for the market.
Stung by high gasoline costs and declining approval ratings, US President Joe Biden is scheduled to visit Saudi Arabia from July 15-16, just as then-President George W. Bush did in 2008, to press the kingdom to pump more crude.
Back then, to combat market speculation that its production was almost at max levels, Saudi officials sought to assure traders that the kingdom had as much as 1.3 million b/d more spare capacity than what the International Energy Agency and many other oil analysts believed, as Muhanna details in his book.
Saudi Arabia may face a similar public relations challenge now, with Muhanna saying fear has crept into the market's psyche. Under the OPEC+ deal, Saudi Arabia is to produce 11 million b/d in August, a level it has only reached twice before in its history. Many are skeptical it can sustain such high levels of output.
But there should be no doubt that Saudi Arabia can fulfil its quota and go beyond, if called upon, Muhanna said.
"11-12 million b/d can be done," he told S&P Global.
Muhanna also spoke with S&P Global about the future of the OPEC+ alliance, how geopolitics influences OPEC policy and the lessons he hopes his book imparts.
Below is a transcript of his interview, which has been slightly edited for length and clarity.
SPGCI: Dr. Ibrahim, thank you so much for speaking with me. Why did you decide to write your book? What are you hoping to communicate to the oil community?
Muhanna: I feel I have something to contribute by writing this book. Some things that are not [studied enough], two things—One is the role of personality in decision-makers. The second is the role of sentiment and information and interpretation of information. The sentiment, some people might call it psychology, of decision-makers, has been a subject not studied in English or Arabic. All studies either talk about geopolitics of energy or energy policies or pure economic issues like supply/demand and reserves.
SPGCI: You've been in that OPEC ministerial room for 30+ years, seeing how decisions get made and participating in those debates. What do you think are the biggest misconceptions in the market about OPEC and how it makes its production policy?
Muhanna: The basics of production policy of Saudi Arabia and for OPEC is to serve the national interest, both in short and long term. That's it. Of course, that can be interpreted differently from different individuals or different time frameworks. And you have to take into account your relationship with producers, and in our case, with our consumers, which is about 50 countries and 80 companies. They're really important for Saudi Arabia.
It's also my belief that all international energy markets, especially oil, need some type of coordination and management. It has been the case for the last 150 years -- Rockefeller, Oklahoma, the Texas Railroad Commission, Seven Sisters. Always there is an attempt and a desire to have this kind of management. And there is a need. For oil, a long-term investment needs at least three years from discovery to start of production and exporting to an international market. The need for stability can be brought by some kind of management, some coordination between the producers. It's the same as central banks. They have to manage the supply of money.
Another reason is, the cost of production from one region to another varies a lot, as high as $35-40/b. If the price drops in a big way, a lot of producers will go out. Therefore, they will create a shortage in the market. And with the shortage, after a couple of months, you will see the prices going up much higher.
SPGCI: OPEC likes to say that it leaves geopolitics at the door. But as you just said, and in your book, you acknowledge that "oil leaders base their decisions on pure national interests, real or perceived." So how much do politics play a role in OPEC and OPEC+ decisions?
Muhanna: Sometimes it plays a big role, sometimes not. Recently, I would say, in the past 5 years or 3 years, it's not. It's a pure commercial examination of the market, in terms of the fundamentals of the market. Again, there can be different numbers and different interpretation of the numbers. I talk with so many people who do the calculations of the international markets – supply/demand and so on. They think the percentage of error in normal times in terms of supply or demand, which is about 100 million b/d now, can be as high as 3%. If you have a crisis, it might go up to 7-8%. This is huge.
Dealing with crises
SPGCI: There are a lot of questions about the future of OPEC+ with Russia. Do you see OPEC remaining partners with Russia, even if it is under sanctions and not able to contribute as a swing producer?
Muhanna: You need the big players, the big producers. OPEC has so many problems with some of its countries. Look at Iran under sanctions. Libya, the situation with their economy, Venezuela. Some other countries. They have really a problem with the market in that they don't have much spare capacity.
You need major players on the supply side, like Russia, or Kazakhstan, or Azerbaijan. They also recognize the importance of joining this. You have to remember, it was the US government which pushed us to work together in 2020, when the oil price went to the negative in Cushing, Oklahoma. Everybody thinks [Russia] will continue as an important exporter and producer for many years to come.
SPGCI: You started in the Saudi oil ministry since 1989. These past few years have certainly been a couple of black swan events, between COVID, the Russian invasion of Ukraine. And then you add to that the energy transition. Not to engage in recency bias, but is this moment the most challenging period that the oil market has experienced?
Muhanna: I wouldn't say that. We have had many challenging moments. There was 1986, when prices collapsed, and the decline in OPEC production from 34 million b/d to 13-14 million b/d.
The Iraqi invasion of Kuwait, where the market lost something more than 4 million b/d. Then you had the Jakarta agreement [in 1997], which collapsed the oil price and would continue for almost 2 years. You had the 2008 crisis, when the price went from less than $100/b to $147/b then back to around $30/b. This was huge. OPEC had to cut production by 4.2 million b/d. 2012, 2020, and now you have another crisis.
I think in the oil market, every 3 years or so, we face some kind of crisis.
But interestingly enough, the system is huge. If you think about 100 million b/d being produced from the oilfield to pipelines to storage to export facilities, all the way to tankers and then another storage in the port and then to the refineries, and then from the refineries all the way to the airports and gas stations, millions of them. It's really a huge system, and we have to deal with it in a delicate way.
I remember one study said US car owners normally had 40% of their tanks in gasoline. If they decide tomorrow to increase it to 60%, you would create a shortage crisis. You'd see the prices go up in a substantial way. The system will not be able to handle this immediately within a couple of weeks. Normally after time, I'm talking about months, the system will adjust and go back to normal.
Always, uncertainties are a major problem, more than the reality of the market, when people don't know what's going to happen after a month or so.
Facts in the market
SPGCI: With all of these uncertainties and crises, you talk about a need to manage the market. So in your view, OPEC+ is here to stay?
Muhanna: Coordination [with non-OPEC partners] is needed. OPEC is not the OPEC which used to be really strong with many strong producers. Many of them don't have enough production capacity.
SPGCI: There's so much information out there, and a lot of the time, it comes down to interpretation, as you said. How did you, in your position in the Saudi energy ministry, help your ministers sort through what information was needed, and what was not matching what you were seeing in the market?
Muhanna: We have really good people, who look at different sources of information and examine them. We also have our own in-house analysis. Since Prince Abdulaziz became minister, Prince Abdulaziz really loves information. He reexamines them and double checks their facts. We now also have [the King Abdullah Petroleum Studies and Research Center in Riyadh], which helps in an advisory way. I would say, we really are one of the best countries with information on the market.
I'll give you an example. One to two months ago, when Prince Abdulaziz said, look at the refineries. The problem we have right now is not the crude side. It's the refining side. We are short products. People did not take him seriously for a while. But later on, everybody now believes that this is a major problem.
The same thing with alternative energies. We are saying we shouldn't move from Plan A to Plan B when Plan B is not ready.
You find a lot of information being processed and judged where our decisions are based on this information.
SPGCI: In your book, you talk about the evolving producer-consumer dialogue. And now there's some talk by some consuming countries to form a buyer's coalition to counter OPEC+. Do you see the market ever getting to the point where consumers might gain the upper hand on suppliers, with the energy transition eating away at fossil fuel demand? Or does OPEC as an organization still have control over the market? How do you see the leverage between producers and consumers playing out?
Muhanna: It's not a question of leverage. It's a question of general interest on both sides. We have two levels of communication with our consumers. The highest level is at the political level. Like, for example, the minister will talk to other ministers.
The second one is Aramco. Aramco has offices around the world. These offices are dealing with the customers, the oil companies who are buying their oil. You see sometimes the adjustment to their oil price. Maybe the price goes higher to Europe, and then the next month, the price differential will be down. Why? Maybe because Aramco is dealing with complaints, that these prices are too high.
So, there are a lot of discussions at the political level as well as at the market level. The same thing with the ministry. The ministry has very good relationships with the consuming governments, even the small ones.
SPGCI: Under the OPEC+ deal, Saudi Arabia's quota will be 11 million b/d by August. That is a level that Saudi Arabia has never produced for longer than a month. What is the maximum amount that Saudi Arabia can produce comfortably and in a sustained manner for months? Is it 10.5 million b/d? 11 million b/d?
Muhanna: 11-12 million b/d can be done. What's really good about Saudi Arabia is they have the system. The system meaning pipelines, storage, and export facilities. When you have all these things, and of course good management, good engineering, you don't have any major problems. And then we have diversified oil fields. Some of them small, some big. But they are capable of increasing production if needed. Of course, you need rigs, but the system itself is capable of getting extra oil if needed.
SPGCI: You're saying the market should not worry whether Saudi Arabia can fulfil its quota?
Muhanna: No, no, no, the market should not worry. One of the problems we faced in 2008 was wrong information about our production capacity. If you look at 2007, people talked about peak oil. Peak oil, peak oil, peak oil. Oil production was peaking and it would decline. This created a negative sentiment, which pushed the price higher and created fears.
The other issue, someone who is sitting in London saying production capacity of Saudi Arabia is X or Y. How do they know? You have to be in there, and you have to be in engineering, to understand how much can be produced, and from where.
SPGCI: So, this focus by the market on OPEC+ spare capacity, which is mostly held by Saudi Arabia and the UAE, and is shrinking, you think those fears are overblown?
Muhanna: I think they are. Again, sentiment, perception, fear.