It is simply Saudi Arabia’s fate that it is held responsible for every little thing that occurs in the global oil markets. If prices go up or down, the finger of blame points her way. If the global economy requires a balance between the supply and demand for oil, all eyes are suddenly on Riyadh, watching intently what the world’s predominant supplier of oil will do next. Again, this is the Kingdom’s fate, and these are its responsibilities, from which it must not shirk, and whose consequences it must bear, no matter what.
During the last few weeks the sharp fall in oil prices—a staggering 20 percent—has surprised everyone. And, naturally, all the attention has suddenly turned to you-know-who. The world’s biggest supplier of oil stood back and watched prices fall, without attempting to lower its output in order to keep them at their previous, higher levels above the critical price of 100 US dollars per barrel, we hear some say. Because of these rumors, a number of conspiracy theories related to Riyadh’s purported role in affecting the global oil-price have start making the rounds: Riyadh is responsible for the drop in prices, part of its nefarious and politically motivated plot to damage the Russian and Iranian economies. And, as usual, this theory has found adherents, who continue to spread it as though it is a given, obvious truth.
Away from all these predictions, expectations and acts of amateurish guesswork, we can see that there really is only one truth here: the only factors responsible for the fall in the price of oil are basic economic ones; it is a simple matter of supply and demand, something confirmed by all experts and specialists. There has been a surge in global supply due to oil coming from outside OPEC, specifically the US shale oil currently flooding the market, and which represents an alternative to crude. In fact, the dramatic drop we’re seeing now was predicted around three years back, but the dynamics of the market and a shortage from key suppliers like Iraq and Libya held back the inevitable. However, once global demand fell in light of the surplus in supply, the inevitable did finally happen, and it is likely we will witness an even larger drop in the coming few weeks, just before the critical meeting of OPEC nations on November 27.
A market leader like Saudi Arabia depends on sustained demand. Oil is not a temporary commodity, but one which will continue to last for at least another 40–50 years. Its price depends on a number of factors, including supply, demand, and the amount of oil reserves around the globe. Economically, it is therefore impossible for just one or two countries to control the global price for a sustained period of time.
The question remains, though, why doesn’t Saudi Arabia reduce its output in order to keep prices at the critical 100-dollar-per-barrel mark, the price it has always said was the fairest for both buyer and supplier? First off, I think those who manage the Kingdom’s oil policies have erred over the last few years by giving the market some false impressions—namely, their continued announcements and comments that the price will continue to remain stable at 100 dollars per barrel, in light of this being the equilibrium point between buyer and supplier. This has convinced the market that keeping the price at this level is Saudi Arabia’s responsibility and not that of any other country, whether a part of OPEC or not. Second, during the global economic crisis, Saudi Arabia was forced to up its supply by unprecedented levels, spending billions in the process. This managed to help weather the storm of the crisis, staving off a worldwide recession and keeping prices at their historic, regular price of 150 dollars per barrel. Every barrel of oil produced but not sold costs the Kingdom, so it is natural that Riyadh endeavors to protect its market share. If there is any decision to reduce production, it will be a joint one taken in concert with all OPEC members, not just one of them.
A journalist from the BBC recently asked me if Saudi Arabia currently used oil as a “political weapon” as it did back in the early 1970s when it cut off supply to the West following the October 1973 war between the Arabs and Israel, and similarly during the in the 1980s following the Soviet Union’s invasion of Afghanistan. My answer was that, yes, Saudi Arabia previously used oil for political leverage, though just once in the 1970s, and this was declared openly by Riyadh, and constituted an exceptional occasion; and if you contend that the Kingdom’s actions contributed to the fall of the Soviet Union, well, then, you must concede that Saudi Arabia is a great nation that succeeded in doing what all the great powers could not.
Here, it would be prudent to remind those who trade in such theories about Riyadh affecting prices and using an “oil weapon” against certain countries, that even if the current situation creates problems for Tehran and Moscow, then this is their concern, not Riyadh’s. Furthermore, it is illogical that Riyadh would intervene to rescue them, for example. Let the United States do it: let it reduce its gushing supply of 3 million barrels of shale oil per day currently flooding the market, and rescue the Russian economy.