By Javier Blas

Picture the scene: Weeks after the world came together at the COP28 summit with a deal for “transitioning away from fossil fuels,” Saudi Arabia, the oil industry’s flagship producer, cancels a planned increase in its crude output capabilities. On paper, it’s the stuff climate activists dream about.

No so fast.

First, the details. On Tuesday, Saudi Aramco, the state-owned oil giant, announced it was abandoning a plan worth several dozen billion dollars to boost its production capacity — with the emphasis on capacity  — to 13 million barrels a day, from 12 million barrels currently. Due to OPEC+ output cuts, Riyadh is well below its maximum output potential, currently pumping about 9 million barrels a day

The cancellation, only months before the first of a series of oil field expansions was due to come on stream, was at the behest of the Saudi government, which by law sets what’s known as the maximum sustainable capacity, or MSC. The financial details of the cancellation are unclear, although it’s likely to save Aramco somewhere between $20 billion and $40 billion in capital expenditures over the next five years.

Yet much of the buildup underpinning the increase in production capacity was already underway, including the expansion of several oil fields: Dammam (set to add 75,000 barrels a day starting this year), Berri (250,000 barrels from 2025), Marjan (300,000 barrels from 2025) and Zuluf (600,000 barrels from 2026). Only the expansion of the Safaniya oil field, slated for 2027 with 700,000 barrels a day extra, hasn’t started.

Currently, Aramco plans to continue to build the four projects it had already started, thus avoiding a write-down. The projects would add 1.25 million barrels a day of additional potential. But Aramco can offset the increase and keep its maximum capacity unchanged by letting output in other more mature fields decline more quickly than it had previously planned.

By scrapping the expansion plan, Riyadh has conceded what was already an open secret: There’s insufficient demand for so much extra Saudi oil in the foreseeable future. That, however, is very different from saying that global appetite for additional crude is diminishing. World oil demand is poised to accelerate for several years before peaking later in the 2030s. But that extra consumption will be satisfied by non-Saudi sources.

Riyadh appears determined — or resigned — to keep production lower-for-longer to keep oil prices higher-for-longer. Only if the kingdom were ready to accept much lower prices there would be demand for extra Saudi oil because, over time, investment would drop elsewhere, notably in the US shale industry. The problem for Saudi Arabia isn’t a drop in the world’s need for crude. Global oil consumption has consistently grown at an annual pace of about 1.2 million to 1.3 million barrels a day over the last 30 years. Its problem is that high oil prices encouraged – some would even say subsidized — surging production elsewhere, from the North Sea in the 1980s to the American shale basins in the 2020s.

This week’s abandonment echoes a long Saudi history of announcing large production expansions only to reverse course later. Retreat has always been a Saudi tactic: Riyadh has ceded market share to its rivals, accepting lower output for higher prices. The history books are clear. In the late 1970s, for example, Riyadh approved an expansion of its maximum production capacity to 14 million barrels a day, up from 10.5 million at that time. It even had ambitions, never realized, to boost it to as high as 16 million barrels a day. The plans were scrapped in the early 1980s. Anyone calling that event a sign that the world was quitting its oil addiction would have got it very wrong. Between 1980 and 2024, global oil consumption nearly doubled.

So what’s true, and has been for a while, is that the world is transitioning away from Saudi crude to American oil — not just from the US, but also Canada, Brazil and Guyana. But any attempt to extrapolate the Saudi cancellation as evidence that the world is now truly shifting away from fossil fuels is a mistake.

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Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.” @JavierBlas. Energiesnet.com does not necessarily share these views.

Editor’s Note: This article was originally published by Bloomberg Opinion, on January 30, 2024. All comments posted and published on EnergiesNet.com, do not reflect either for or against the opinion expressed in the comment as an endorsement of EnergiesNet.com or Petroleumworld.

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EnergiesNet.com 02 19 2024