Saudi Arabia's Motives | Russell T. Rudy Energy LLC
In a recent opinion piece in “Rigzone”, author Faraz Shams makes the case that Saudi Arabia’s recent efforts to crater the price of oil are driven by economic vs. political motives. He dismisses the opinions of those who think that the Saudis are primarily trying to punish Iran and Russia and put an end to the shale revolution.
Shams points out that Saudi Oil Minister Ali Al-Naimi rose through the ranks of Aramco to become its CEO. As such he was considered a technocrat, and not a politician, when he was appointed Oil Minister in 1995. The reasoning goes that Naimi is driven purely by economic considerations and merely wants to let the free market dictate the price of oil. While this seems to make sense, it ignores the fact that OPEC in general, and Saudi Arabia in particular, have not hesitated to curtail oil production in the past to manipulate prices and advance their political agenda. This goes as far back as the Arab Oil Embargo of 1973.
By driving down the price of crude Saudi Arabia thinks it can convince global consumers that it is not a retrogressive cartel obsessed with maximizing profits. Diplomatically this would curry favor with China and India who are massive consumers of imported oil. Both subsidize fuel prices for consumers for political reasons, but at great economic cost. Crude prices at their current levels are an economic windfall to the governments of these countries.
Strategically, low prices make sense for Saudi Arabia. They can curtail the shale revolution, stifle exploration in the Gulf of Mexico, damage rival Iran and leftist Venezuela, and in conjunction with U. S. and European Union sanctions, further impede production growth in Russia.
Shams concludes by saying “…the Saudis’ reluctance to lower crude production is based more on sound economic and business sense rather than the ulterior political motives often touted in public discourse.” It is impossible to know if the Saudis are motivated by economics, but enjoying ancillary political benefits, or vice versa. Nevertheless, I think the author is understating the importance of political considerations to the kingdom.
To read the article in its entirety, please go to www.rigzone.com/news/oil_gas/a/136893/ .
