The arithmetic is straightforward. In round numbers, Saudi Arabia grosses $549 million/day producing 9 million b/d of crude oil and, with subsidized internal consumption at about 2.9 million b/d, exporting 6.1 million b/d when the crude price is $90/bbl. It generates the same revenue producing 9.76 million b/d and exporting 6.86 million b/d if the oil price slips to $80/bbl, which at this writing seemed possible. And if the kingdom produces at its estimated capacity rate of 12.4 million b/d and exports accordingly, it still earns $549 million/day if the price doesn't fall below $57.80/bbl.
These numbers demonstrate a longstanding truism of the oil market: The world's largest holder of crude oil reserves, all in reservoirs conventional in every way except scale and performance, has options not available to most other oil-producing countries. The kingdom also has immense cash reserves and can afford to work below these revenue thresholds far longer than most producers, private or state-owned, can endure oil prices much below $70/bbl. So, with the oil market under siege from rising supply, sagging demand, and a strengthening dollar, what will Saudi Arabia do?
Looking for restraint
As the price of Brent crude falls below $90/bbl, markets are looking for signs of production restraint from the Organization of Petroleum Exporting Countries. Indeed, OPEC responded with uncharacteristically effective coordination to rescue the market from its collapse in the second half of recession-year 2008. But that was then. Conditions have changed.
More than ever, Saudi Arabia dominates OPEC. Most other members produce near capacity rates and manage national accounts at the mercy of the market. They resist cutting production before prices rise, depending for that on Saudi Arabia. Riyadh, though, has extraordinary reasons to want crude prices to move the other way. Controlling 85% of OPEC's spare production capacity of slightly more than 3 million b/d, it can make that happen.
At least for the next several months, expectations for crude prices must account for unusual strains on Saudi Arabia, including:
• A list of extreme diplomatic and geopolitical pressures on the kingdom includes the possibility that perpetual rival Iran soon might possess nuclear weapons.
• Capture by Islamic State militants of territory along the Syria-Iraq border and elsewhere in Iraq establishes a terrorist stronghold designed, no doubt, with targets to the south in mind.
• Qatar has earned Saudi scorn by supporting the Muslim Brotherhood in Egypt and Syria and in other ways flaunting independence from its larger neighbor.
• Neighboring Yemen reels near collapse from Shia Houthi fighters marching on Sanaa, armed with weapons thought to have come from Iran; from continuing militancy of Sunni Al Qaeda in the Arab Peninsula; and from growing pressure for repartition. Yemeni terrorists have crossed the border to hit targets in Saudi Arabia.
• Avowedly disappointed over US dithering in Syria and Iran, Saudi officials have reason to treat the superpower more than before as a competitor in the oil market and less as a trustworthy protector.
• In the longer term, the kingdom's oil consumption rate is zooming, having doubled since 2000.
• And the country has more than 800,000 b/d of export-oriented refining capacity coming on stream. Expansion of its roles as an export refiner and oil consumer will moderate, though hardly extinguish, enthusiasm for crude-price strength over time.
A ready solution
More immediately, however, the Saudis have reason to see a slump in the price of crude oil as a ready solution to many problems.
A lower price would financially weaken Iran and Russia, both of which contradict Riyadh's position on Syria with their support of President Bashar al-Assad. It at least would chasten mischievous Qatar and restive Baghdad. It would devalue oil bootlegging essential to Islamic State adventurism. It might choke external support for Yemeni destabilization. And it would discourage costly production and thereby address competitive nuisances in the US and Canada.
Under current conditions, no one should expect Saudi Arabia to cut production in defense of the price of crude.
