Anyone whose business needs the price of crude oil to exceed $70-75/bbl in order to be profitable should watch Saudi Arabia, about which a few observations follow:
• Contrary to popular supposition, the kingdom's influence over the price of oil works more powerfully downward than upward. Saudi Arabia can raise benchmark price levels by cutting production, but this tactic inevitably comes at the price of lost market share and, if prices don't rise sufficiently, diminished revenue.
• Conversely, Saudi Arabia can lower crude prices by increasing production. By definition, this ability depends on unused capacity. In December, the International Energy Agency estimated the country could bring 2.65 million b/d of crude oil production on stream within 30 days and sustain the incremental output beyond 90 days.
• For many years, the kingdom has declared and abided by the intention to keep 1.5-2 million b/d of production capacity idle for use in global supply emergencies.
• Developments in the oil market and international politics give Saudi rulers reason to wonder if maintaining spare production capacity for the sake of market stability represents the best use of money.
• Rapidly rising, high-cost production of crude oil and bitumen in North America is lowering requirements for imports in the US, the world's top consuming country, and intensifying competition in oil trade.
• Production from three other important members of the Organization of Petroleum Exporting Countries—Iran, Iraq, and Libya—remains far below geologic potential for reasons of instability or international sanctions. When those constraints ease, the expectation within OPEC then will be for Saudi Arabia to trim its output to allow supply from cartel partners to re-enter the market without lowering the price of crude—to idle even more production capacity, in other words.
• Sunni Saudi Arabia sees Shia Iran as a threat to its existence.
• Saudi Arabia fears Iraq, a majority of the population of which is Shia, will align with adjoining Iran.
• Since the withdrawal of US troops from Iraq, the Iraqi president, a Shiite, has jailed Sunni leaders and in other ways spurned religious pluralism.
• What Saudi Arabia sees as an emerging Shia axis between Tehran and Baghdad extends eastward into internally striven Syria, where the murderous regime of Bashar al Assad receives support from Tehran and Moscow.
• Failure by the US to respond to Assad's atrocities against his Syrian opponents last year evoked uncharacteristically blunt criticism from Saudi leaders.
• The Saudis also find appalling the measured US thaw in relations with Iran, manifest in the easing of sanctions imposed against the Islamic republic to resist its development of nuclear technology, thought to include weaponry.
• Oil exporters have raised oil production in the past to squeeze rival exporters by lowering prices. Kuwait did so in 1990 when it correctly feared it was about to be invaded by Iraq and wanted to keep money out of Saddam Hussein's war chest. In 1998, Iraq, then still ruled by Saddam, overproduced the market's need for its crude to pressure neighbors into supporting an end to United Nations sanctions. And some observers still believe, probably incorrectly, that Saudi Arabia wrecked the oil market in 1985-86 to crush the Soviet Union as a favor to the US.
• Saudi Arabia—feeling threatened by Shia consolidation in Iran, Iraq, and Syria; usurped by Russian support of Assad; and abandoned by the US—might wonder why it should watch its low-cost share of the oil market yield to supplies from shales, oil sands, deep water, and the Arctic.
• With a budget burdened by social payments made to appease a restive population, the kingdom must balance internal revenue needs against external pressures. But its financial reserves are formidable, and threats from abroad typically unify societies.
• A question looms: At what point might the House of Saud decide it must respond unilaterally to oil-market competition, Shia encroachment, and American indifference? There will be no press release about any of this, of course. But an oil-supply surge of 2 million b/d or so would make quite a statement.
