Oil Market Dynamics – Saudi Arabia Oil Policies and US Shale Supply Response

This presentation outlines the current uncertainties engulfing the oil market focusing on two key dynamics: Saudi Arabia oil policies and the new dynamics unleashed by US shale production. It is argued that Saudi oil policy is rooted in fundamental features of Saudi Arabia’s political, economic and social systems. These include:

• High dependency on oil revenues
• Massive oil and gas reserve base which will be exhausted over many decades
• Its dominance in oil markets and oil trade
• The availability of idle (spare) capacity
• Leadership among oil-exporting countries
• The challenge of long-run economic development
• The vital importance of achieving political and internal stability

It is argued that maximizing revenue remains a key objective for Saudi Arabia but that this should be balanced against the objective of maintaining volumes above a certain level and avoiding loss of market share. The trade-off will be shaped by market conditions, cohesiveness of OPEC, and internal conditions of the country, which will determine the direction that policy will take. Therefore, Saudi Arabia oil policy is not constant and there is no desired ‘oil price’ (price is a moving target depending on market conditions). US Shale has generated a new set of challenges and uncertainties making the calculus of the trade-off more difficult and uncertain.

By: Bassam Fattouh

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