It is impossible to analyze the real time dynamics of the global oil market without a grasp of the myriad domestic/regional economic, diplomatic and national security dilemmas that govern the formulation of Saudi Arabia’s oil pricing strategy. Saudi Arabia owns the highest proven reserves in OPEC, is its leading exporter, controls its largest space capacity and has its lowest oil extraction costs. A founder member of OPEC, Saudi Arabia has played the role of its primary powerbroker ever since the end of the October 1973 war and the OPEC petrodollar bonanza in the reign of King Faisal, whose protégé Oil Minister Sheikh Ahmed Zaki Yamani, was the first global media icon of Arab oil.
There are natural tradeoffs and even contradictions in Saudi oil pricing and production strategy. Keeping oil prices low helps Saudi Arabia preserve its downstream market share, boost economic growth in key allies such as Britain, France, the EU, Japan and China and restrain Iranian subversion in the wider Middle East. However, at a time when the kingdom runs twin current account and budget deficits, has embarked on ambitious social-economic transformation embodied in Vision 2030, relies on “riyal politik” to assist close regional allies (Egypt, Bahrain, Morocco, Jordan and Pakistan), there is a natural incentive to maximize the value of its only significant natural resource – 260 billion barrels of proven oil reserves.
The meteoric growth of US shale oil output and the imminent floatation of a stake in Saudi Aramco, the world’s largest oil company, necessitates the kingdom averts another catastrophic oil price crash, as happened in 2014-15. Saudi Arabia also needs to be sensitive to the national interests of Russia in its global oil diplomacy, given the Kremlin’s role as the primary arms supplier to the Baathist Syrian regime in Damascus and the Ayatollah regime in Iran. In fact, a Saudi-Russian entente to coordinate output cuts enabled oil prices to recover from a meltdown below $30 a barrel in early 2016.