Competing goals make Saudi oil policy hard to predict

10-Mar-2016

When Saudi Arabia last month announced with Russia and other big oil producers a conditional agreement to freeze production at current levels in the face of rock bottom prices, the decision was seen as an indication that it was changing policy. Economics had finally trumped geopolitics. Where Riyadh’s earlier decision not to cut output was seemingly spurred by geopolitical rivalry with Iran and Russia, economic hardship had catalysed co-operation.

It is correct to focus on both economics and geopolitics in assessing Saudi behaviour. There is just one problem: most people get it back to front, concluding that geopolitics are the dominant driver when economics are, and vice versa.

In 2014 Saudi Arabia convinced other Opec members to abandon efforts to support prices by cutting output and to prioritise instead the protection of market share. This precipitated the dramatic price collapse of the past few months. Given Russian and Iranian support for, and Saudi opposition to, Syrian President Bashar al-Assad — and the growing possibility of a nuclear deal leading to the lifting of sanctions against Iran — analysts were inclined to see the Saudi-led decision as geopolitically inspired. The new approach unquestionably created more hardship for the kingdom’s nemeses: Iran and Russia.
But the fact that something desirable results from an action does not necessarily mean it was the cause of it. In fact, the Saudis had little choice but to opt for a market share approach in 2014. Like others, they misjudged the depth of the price collapse to come. Yet they understood that US shale oil had created new dynamics that limited their choices. (by Meghan O’Sullivan, Financial Times)