Kingdom in control

Little changed in consequence of the Dec. 4 meeting of the Organization of Petroleum Exporting Countries. Saudi Arabia remains in control of the price of crude oil.

To understand why this is so, imagine what the oil market would be like if supply were 500,000 b/d lower than it is now. (Hint: The crude price would increase and stay above the current level for a while.) Now imagine the market with 2 million b/d more supply. (Hint: Oil producers shouldn't want to think about this.)

Aggravating weakness

The former datum is roughly the amount by which Saudi Arabia has increased its production relative to a year ago, when the organization it dominates created panic by declaring targeted output would not be increased in defense of the crude price. In other words, it's the amount by which the kingdom has not caused but rather aggravated market weakness. Beginning early this year, Saudi Arabia deliberately raised production and could, as a matter of volition, lower supply by a like amount.

Or it could raise supply by a further 2 million b/d. That's how much production capacity the kingdom holds idle. The Saudis, again as a matter of volition, could crush an oversupplied market.

So the oil market faces rescue, ruin, or more of the painful status quo, depending on what Saudi Arabia does. Those who say the kingdom no longer matters need to rethink their assumptions.

What, then, will Saudi Arabia do? As always, Saudi officials will pursue whatever course they think best serves the kingdom's interests. But discerning those interests isn't easy.

Saudi Arabia hurts, too, with the crude price below $50/bbl. It's outspending revenue, borrowing money, and reconsidering consumption subsidies. As long as it funds national spending largely from oil sales, it can't abide crude prices at recent levels forever-just longer than most other producers.

Saudi officials express a good reason not to cut production to defend crude values: Other producers quickly would capture the sacrificed market share. When non-OPEC production lacked upside, OPEC-led, as always by Saudi Arabia-could manage supply at the margin of the market fairly effectively. Now, with supply from prolific shales available at high rates within weeks, the condition doesn't apply. The Saudis and their OPEC colleagues recognize and seem determined to avoid new perils of swing production.

Furthermore, low crude prices weaken Saudi adversaries like Iran, Russia, and the Islamic State. They also amplify competitive disadvantages of carbon-free energy. For now, present circumstances might, in the Saudi view, constitute the best among available options.

So OPEC did nothing but meet in Vienna on Dec. 4. It didn't reinstate a quota for Iraq, lately producing 1 million b/d more than a year ago. And it neither reasserted its longstanding 30 million b/d group target nor raised the quota to accommodate overproduction reflecting Saudi and Iraqi increases. It simply noted expectations for 3.4% demand growth next year and for contraction of non-OPEC supply and recommended members "closely monitor developments in the coming months." No one in OPEC needed reminding that those developments probably include increased Iranian supply as the Islamic Republic escapes international sanctions.

Balance in view

If not for the Iranian increment the oil market in 2016 would be headed for long-awaited balance. Projections in the International Energy Agency's November Oil Market Report imply a decline averaging 100,000 b/d in stock-and-balance changes next year after a 1.8 million b/d increase so far this year-if OPEC crude production stays near the recent average of 31.2 million b/d. Especially interesting is the amount by which Iran is thought to be able to raise production soon after sanctions disappear: 500,000 b/d, the amount of this year's Saudi increase.

In the past, that production boost might have been interpreted as place-holding for an OPEC colleague. Now it might instead be a warning shot at a geopolitical adversary. Saudi decision parameters are seldom clear. Saudi production choices, though, are always important.