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Analysis: Saudi's Role and Control with the Oil Market

Nick Butler writes in the Financial Times : "To me the interesting thing is what happens next, and that is down to the Saudis. The risk for the whole industry, and for many countries dependent on oil revenues, is that Saudi Arabia’s games have led them to lose control of the market. Prices could go a good deal lower with wide and mostly negative consequences, starting with more regional instability and a cutback in investment which can only feed the next cycle."  

The piece continues: "The challenge now is whether the Saudis are in any position to reverse the price fall. The danger of the trend which we have seen since June is that with each step downwards, other producers are tempted to increase production in the short term in order to maximise much needed revenue. Any field which can produce a bit more is pushed a little harder; normal maintenance schedules are postponed and so on. That is what seems to be happening. The price fall over the last three months has not produced any fall in production."  

The piece then states: "The only action which would break this trend is a sharp and sustained cut in output by Saudi Arabia... Can they do it ? The judgment is very marginal. Restoring order will require a serious cut in output of perhaps 2 million barrels a day for a sustained period to rebalance a market which is in surplus even in the absence of significant supplies from Libya and Iran. In the short term such action would require a rewritten budget, reduced domestic welfare and defence spending, and a cut in some of the subsidies being made to allies in the region who are trying to maintain order after the Arab Spring."

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