A new Bloomberg article points out that Saudi Arabia will likely increase its crude oil production in order to expand local refineries. If production follows through according to plan, then the country’s production would increase to the highest levels it has seen in the last two years – incurring an even higher surplus of crude oil. This becomes more apparent when one considers that other OPEC countries do not plan on reducing production: doing so would inevitably lead to a suboptimal level of exports. This problem is further exacerbated by the fact that U.S. oil production has risen to its highest level in three decades.
Between Saudi Arabia, Kuwait, the U.A.E., Qatar, Bahrain, and Oman, the capacity for refined oil increased seventeen percent this past year. Each of these countries is planning to significantly expand these capacities through 2020. The hope is to ‘steal’ the extra margin from other producers, however, the article points out that the effect on the global crude market would be minimal since it would be “processed locally before being exported.” It would adversely affect the profits of European and Asian refiners.