Since March we have suggested, and then witnessed, a Saudi-US policy of pushing down oil prices to rein in Russia. Nevertheless, Saudi motives in doing this have mystified many observers. On the face of it, this mystery ended on 22nd December when the Saudi oil minister Ali al-Naimi gave a frank statement to Middle East Economic Survey intended to explain the Kingdom’s oil policy. He said:
“It is not in the interest of Opec producers to cut their production, whatever the price is. Whether it goes down to $20, $40, $50, $60, it is irrelevant.
“We have entered a scary time for the oil market and for the next several years we are going to be dealing with a lot of volatility. Just about everything will be touched by this…
“…We want to tell the world that high efficiency producing countries are the ones that deserve market share. If the price falls, it falls . . . Others will be harmed greatly before we feel any pain.”
The Saudis are prepared to endure prices as low as $20/barrel in order to knock out higher cost production from US oil shale and other sources. al-Naimi also said that the Kingdom would not hesitate to issue sovereign debt for the first time in order to make up for lost oil revenues, meaning the Kingdom would tolerate far lower prices than most analysts believed.
This statement will, among other effects, help to remove a floor from the oil price, since analysts can now discount the idea that it is in Saudi interests to prevent a further collapse; the sub-text of al-Naimi’s comments is that the lower the price the better in the next 12-24 months. It would be a very bold trader who bet on a sustained rebound in this period.
While there is little doubt Saudi policy is in large part motivated by al-Naimi’s stated aim of taking market share and pushing out the less efficient producers, it would be naïve to think this is a complete explanation (and equally naïve to imagine Saudi Arabia would openly declare economic war on Russia and Iran). This visceral fear that oil is in terminal decline as fuel and that Saudi will be swamped by new production from the US, Brazil and other sources compounds the rather beleaguered thinking of the Saudi leadership on other matters.
In short the al-Sauds (as well as the Emirati ruling family, who seem to have very similar views on the most important energy and security matters) fear that their days are numbered for the following reasons:
Crashing oil prices therefore serves a number of inter-related Saudi objectives simultaneously. The Saudi and Emiratis think very carefully and deeply about strategic matters, and can pursue strategic objectives more directly and consistently than democracies can (with the obvious flip side that errors are likely to go uncorrected). In other words the great economic pain of this oil policy is being embraced only after deep consideration and in the belief that it serves the following ends:
Of course the third point is slightly counter-intuitive, as the US cannot be pleased that its domestic oil industry is being disrupted in this way. But the US-Saudi marriage was always more one of convenience than love, and this policy will certainly remind the US that Saudi is still a serious player whose security is of direct importance to the US – and to common US interests in Russia and Iran.