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| “If prices continue to be low, we will be able to withstand it for a long, long time,” said Khalid al-Falih, the chairman of Saudi Aramco. Fayez Nureldine/Agence France-Presse — Getty Images |
Call it the Saudi calculus.
Oil prices were already plummeting 14 months ago when, at Saudi Arabia’s insistence, OPEC put the global petroleum industry on notice: The member countries would not try to prop up prices by cutting production.
“We don’t want to panic,” Abdalla el-Badri, secretary general of the Organization of the Petroleum Exporting Countries, told reporters at the group’s November 2014 meeting in Vienna. “We want to see how the market behaves.”
Since then, the market has behaved in a way few could have predicted — including Saudi Arabia, the world’s biggest oil exporter. The price of oil has collapsed under the weight of a growing international glut, made worse by slower growth in the global economy.
And yet the Saudis keep pumping oilat virtually full capacity. And they have persuaded their Persian GulfOPEC allies — Kuwait, the United Arab Emirates and Qatar — to do the same, despite mounting pressure from other big OPEC members to curtail production.
It is a risky strategy — one that is already straining Saudi finances and threatening the kingdom’s ability to continue providing generous social programs, like subsidized housing and cheap energy, that the royal family has long used to buy domestic tranquillity.
Oil provides more than 70 percent of Saudi government revenue. And though the Saudis still have about $630 billion in financial reserves, they are spending them at a rate of $5 billion to $6 billion a month, according to Rachel Ziemba, an analyst at Roubini Global Economics in New York.
But so far, Saudi Arabia is essentially betting that it can win an oil-price war of attrition — not only against its OPEC rivals like Iran, Iraq and Venezuela, but also against non-OPEC rivals like Russia and the many shale-oil producers in the United States that have contributed to the global glut.
The Saudis argue that throttling back oil production for a short-term pop in the price would be throwing a lifeline to the shale producers in the United States, some of which have already shown signs of wilting in the current environment.
