NCPA - National Center for Policy Analysis

It Will Take Much Cheaper Oil for Saudi Arabia to Take Action

September 3, 2015

Saudi Arabia has spent the past nine months trying to safeguard its share of the global oil market, increasing its own extraction to record levels. This seems self-defeating, especially after oil prices hit a six year low.

Many claim the Saudis are trying to drive American "frackers" out of business, although, it's more likely that the action is directed at their rivals Iraq and Iran. Both of these countries are pumping more oil than ever to regain market share after their respective periods of conflict.

  • Saudi Arabia can choose to ignore an OPEC request to cut back oil production or it can blame the Chinese economy for falling demand.
  • It is unlikely that it will strike out a deal with Iraq and Iran because of their longstanding tension over regional supremacy.
  • The Saudis don't want to bear the burden alone. They still recall the early 1980s when they cut production and yet prices continued to fall.

High-cost oil producers, such as Brazil and Canada, at present, have less incentives to pump oil. However, coordinating an output cut among the other producers is complicated as cash-strapped countries have a big incentive to cheat unless the price of oil goes even lower.

Saudi Arabia's public spending has ballooned, but it has foreign assets to sell and a debt ratio of just 1.6% of GDP. That gives it the leeway to avoid making a rushed decision.

Source: "It will take much cheaper oil for Saudi Arabia to take action," The Economist, August 27, 2015.

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