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.
Above all, as recent events in Algeria, Yemen and Sudan demonstrate, Saudi Arabia is implementing economic reform at a time of epic political violence and social unrest across the Arab world. Security, not economics alone, dictates Saudi Arabian oil diplomacy at the highest nexus of world politics. President Donald Trump, imperious and unpredictable, is the leader of a superpower that has underwritten the security of the kingdom since Franklin D. Roosevelt met King Abdul Aziz on a warship in the Red Sea in early 1945. Saudi Arabia simply cannot be seen as the catalyst of a “gasoline price shock” that could cost President Trump reelection in 2020.
After all, the US Navy’s aircraft carriers and missile boats maintain the balance of power in the Gulf, as demonstrated by the deployment of the USS Abraham Lincoln, with its squadrons of F-18 Hornets and its Tomahawk missile batteries to the Gulf. This constraint alone suggests Brent crude above $75 a barrel will be met with an increase in Saudi output to nudge down prices.
Saudi Arabia’s national interest also dictates that it raises output to supply Asian countries dependent on of Iranian oil imports, which the Trump White House has pledged to strangle with draconian sanctions. This is another factor that amplifies divisions in OPEC between Saudi Arabia, Iran, Iraq and other price hawks desperate for higher petrocurrency revenues.
Oil prices have plunged 20% since early May 2019 after US-China trade talks collapsed and US crude inventories rose 22 million barrels to 1990 highs. This steep fall in oil prices forces Saudi Arabia to fine-tune its 1.2 million barrels output cut pact negotiated with OPEC and non-OPEC exporters led by Russia. Russia has actually increased tanker shipments from its Baltic/Black Sea oil ports in order to offset contamination in Gazprom gas pipelines to its German Benelux and Italian clients in the EU.