Understanding Saudi Arabia's Oil Policy and OPEC Dynamics
Cartels like the Organization of the Petroleum Exporting Countries (OPEC) typically aim to push prices higher. However, Saudi Arabia, a leading member, is currently driving prices down. The Saudi strategy is to discipline non-compliant producers such as Kazakhstan, Iraq, and the UAE, who have exceeded their output targets. By advocating for higher production across OPEC+, Saudi Arabia hopes the ensuing price drop will enforce compliance.
Key Insights
- Cheating by Member Countries:
- The non-compliance by countries like Kazakhstan, Iraq, and UAE is worsening, prompting Saudi Arabia to take action.
- Saudi Arabia has historically used price wars to discipline OPEC members, notably in 1985, 1998, and 2020.
- Saudi Arabia's Production Strategy:
- Saudi Arabia is prioritizing higher production, leading to lower prices.
- The kingdom appears comfortable with Brent crude below $70 per barrel, a shift from the previous goal of maintaining around $100.
- Multidimensional Policy:
- The aim to keep Kazakhstan in line is one of several motives driving Saudi oil policy.
- Maintaining control over oil prices may involve several strategic considerations.
Factors Influencing Saudi Oil Policy
- Unsustainability of Previous Price Policy:
- The goal of $100-per-barrel was unsustainable without further cuts; Saudi output was the lowest since 2011.
- Benefit from US Sanctions:
- Sanctions on Iran and Venezuela have benefited Saudi Arabia.
- Anticipating a lift on sanctions, Riyadh may be increasing production preemptively.
- Competition with External Producers:
- Saudi Arabia has a history of battling external producers like the US.
- Political challenges may make a new price war with US shale difficult.
- Relationship with Russia:
- The Saudi-Russian relationship is more transactional than strategic.
- Riyadh might be hedging against potential future shifts in this alliance.
- US-Saudi Talks:
- Negotiations with the US on defense, arms contracts, and nuclear programs involve oil as a key factor.
- Upcoming meetings, including President Trump’s visit to Riyadh, are significant.
Overall, the policy of allowing falling oil prices is informed by multifaceted considerations, of which keeping Kazakhstan in line is likely a collateral benefit rather than the main driver.