The Saudi oil strategy

U.S. energy production has increased in economic importance, but it’s nowhere near the level of significance in countries such as Saudi Arabia. What’s the Saudi plan for coping with today’s low oil prices? NC State University economist Mike Walden responds.

“Well, the main reason why oil prices and, by extension, gas prices have come down is because we have more supply than there is demand. Now traditionally when this has happened in the past, the swing country in the world in production, Saudi Arabia, would reduce their level of production, thereby pushing up a crisis. They’ve not done that this this time, and they’ve signaled that they aren’t going to do it, and the big question is why.

“And we think there are two reasons: One has been discussed a lot, and that it is that Saudi Arabia’s arch enemy is Iran. Iran obviously also depends upon oil revenues. The Saudis are hoping that the lower price of oil will hurt economically and thereby militarily Iran, and that’s one of the objectives of the Saudi plan.

“But we now think there is a second reason that the Saudis are doing this, and that is to try to curtail production of oil in the U.S. The U.S. increase in production has been a big reason why we have a worldwide glut of oil. The Saudis are expecting that with low prices of oil, this will mean that many of the new drillers in the U.S. will find that they can’t make a profit drilling and that they will shut down. That will reduce supply, and eventually prices will go up. This is a very dicey strategy by Saudi Arabia. It’s going to be very interesting to see how it unfolds.”