Why did the country opt not to cut production? Saudi Arabia is one of the main players in the oil market, supplying 12-13 percent of the total daily oil output worldwide. As the second biggest oil producer after the US, it wants to preserve its share in the market and a cut in production would threaten this share, which takes a long time to regain.
http://www.investopedia.com/articles/investing/031715/how-saudi-arabia-benefits-low-oil-prices.asp
However, things are not that simple, even if the above-noted thesis is taken at face value. Things change.
Saudi Arabia's reputation in global affairs, while never stellar, has suffered recently and attitudes between it and many countries have changed:
- technological advances in oil and gas exploration and extraction have reduced the commanding position once occupied by Saudi Arabia in the global supply of oil and gas - other areas have increased production and other non-fossil energy sources are becoming more viable
- concurrent with a reduced reliance on Saudi oil is a developing global impatience with Saudi Arabia's export of Wahhabism and the disruption it has caused within and outside the Islamic world - the country is becoming more isolated diplomatically
- the negotiation of the Joint Comprehensive Plan of Action to (JCPOA) concerning Iran's nuclear program has had two major consequences for Saudi Arabia: the release of Iran's frozen financial assets and more importantly, increased access to foreign markets for its oil. The agreement was negotiated in the face of strenuous opposition from Saudi Arabia
At the same time, Saudi Arabia must contend with a very young, underemployed and potentially volatile population. At present, social peace has been purchased in the form of all manner of subsidies for housing, fuel and social support programs. The social fabric is under strain and could rupture suddenly. This is complicated further by intense jockeying for power amongst the ruling class, an outcome which could result in further uncertainty.
While oil markets are depressed, the potential for conflict in the Middle East between Saudi Arabia and Iran is greater than in years previous.
Here is a very interesting take on the relationship between Saudi Arabia and Iran, one of the best I have read in years. As always, it is worth noting the credentials of the author.
Sinking oil prices (crude dipped below $32 this week) further diminish the costs for risky behavior and mute international repercussions. Iran, for one, would be relieved to see Gulf tensions raise oil prices as it tries to reenter the global energy market.
Saudi leaders are determined to forge political order within and outside its borders. Its actions and rhetoric this week show that they cannot do so without resorting to sectarianism and bellicosity. As Saudi Arabia’s marginal returns of confrontational policy diminish due to unfavorable circumstances in the Middle East and inside the Kingdom, it must increasingly ratchet up the stakes to retain the same level of return and benefit. However, violent sectarianism is not a manageable policy, and can empower forces—such as ISIS—that will be further detrimental to regional order and to the stability of Saudi Arabia itself.
A New Era of Brinkmanship in the Middle East
Most important, I believe that the ruling class in Saudi Arabia is isolated from the realities of life in the kingdom. It has the luxury of unprecedented wealth and is not accountable to anyone except a limited constituency (the clergy, military). This isolation, whether intentional or an unintended by-product, has the potential to re-enforce prevailing attitudes and adherence to established ways of conducting the business of government. There are few avenues for gradual change (e.g. meaningful elections, more equitable ways for citizens to participate in the economy). As a result, change often takes the form of revolts ... small surprises have the potential to ignite major shifts as per the Arab Spring ... the clock is ticking.
I have compiled a list of oil and gas companies which could increase production quickly in the event of a disruption (or the hint of a disruption) in the flow of oil from the Gulf.
Some characteristics:
- cash on hand and access to sources of additional money
- operations in stable countries served by the rule of law and a robust infrastructure to support the industry
- production which could be brought on stream very quickly at low risk
- a record of low costs achieved through efficiencies which will add to profitability
- ownership of processing facilities and ready access to pipelines and/or rail transportation
- excellent management
Contingency planning perhaps, but for all of his faults, Baden Powell had it right:
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