THE SAUDI PRODUCTION INCREASE: PART OF A TREND?

Saudi Arabia's unilateral decision to increase production by 500,000 b/d usefully reminds everyone that Saudi decisions on oil production always reflect Saudi interests.

Saudi Arabia's unilateral decision to increase production by 500,000 b/d usefully reminds everyone that Saudi decisions on oil production always reflect Saudi interests.

Those interests are both commercial and political and, therefore, difficult to assess from the outside. What is more, they are in a transition with implications for oil producers everywhere.

Saudi decisions do not, except by coincidence, reflect the interests of the Organization of Petroleum Exporting Countries. As expressed in official pronouncements, OPEC interests are altogether political and reflect whatever consensus the group is able to achieve on a given day. As expressed in production behavior, OPEC interests are the net outcome of individual decisions by member governments acting in their own economic and political interests.

Saudi Arabia, by virtue of its enormous reserves and production capacity OPEC's most important member, prefers to fold its interests in with those of the group. But it will bolt from consensus when group interests conflict with its own. It has done so in the past. It has just done so again.

The action certainly shows Riyadh's distaste for $30/bbl crude oil. It might also represent an early signal of a long-term strategy to hold the price much lower.

The Summer 2000 issue of Canadian Energy Research Institute's World Oil Quarterly argues that the Saudi monarchy has adopted a low-price strategy as a matter of survival.

The House of Saud, CERI points out, faces not only persistent threats from powerful neighbors Iraq and Iran but also, increasingly, the internal threat of radical Islam.

With stagnant oil revenues unable to sustain living standards of a rapidly growing population, growing political discontent finds voice in Islamic fundamentalism. The government has responded with aggressive efforts to stimulate the economy through liberalization.

And, CERI argues, it has come to favor low oil prices as a way to secure both markets for Saudi crude and defense against aggression.

"In the face of the external threat to Saudi Arabia," CERI says, "the House of Saud may be in the early stages of adopting a radical new long-term blueprint to help maintain its strategic significance to the US - a low-oil price strategy."

The Saudi announcement this week fits the CERI analysis in both its objective regarding crude price and its independence from OPEC, most members of which naturally favor high prices over time. It also asserts confidence in Saudi Arabia's capacity to produce crude, which a few analysts had called into question.

Markets had no apparent misgivings. Crude prices turned downward this week. If CERI is right, the trend will last awhile.

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