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Saudi Arabia faces dire challenges: a burgeoning population that lives off of oil, and a growing royal family that lives extravagantly off of oil. The country is now running budget deficits, and otherwise is clearly living beyond its current means
…the Saudi’s hope is to stave off the day when they are the [political] disruptor of the Middle East…
So Saudi Arabia would like production cutbacks to drive up prices. What does the logic of cartels suggest will happen?
First, real-time data on OPEC production do not exist. That’s because cheating is rampant, and countries understate actual production. Scan the news and you’ll find stories galore on both the lack of data and (given that constraint!) the likely magnitude of cheating. After all, Saudi Arabia is not alone in finding itself squeezed between low oil prices and bedrock. Small producers pay lip service to the cartel, but in practice are selling all they can pump.
What of Saudi Arabia themselves? They currently pump about 1 in 8 barrels of oil, that is, 10 million of a global 80 million barrels per day. (OPEC pumps 42% officially, a bit more in reality.) So if Saudi Arabia cuts output 10% or 1 million barrels, global output falls 1.2%. Price does respond to demand, but even if it’s quite inelastic (0.3) that means price will go up by less than 5%. Hence Saudi revenue would fall 5%. Or more. So they simply cannot afford to cut output.
The greater the extent that others are capable of boosting output on the margin (think drillers in the US), the worse off the Saudis would be. (At present, for example, the US is sitting on record high inventories. As interest rates rise, that will pressure those “long” in the market to sell. A Saudi-induced bump in prices would accelerate that process, to the detriment of the Saudis.)
That doesn’t mean prices will necessarily remain low. Demand can change for a variety of reasons, and supply is subject to political disruptions. The Saudi’s hope is to stave off the day when they are the disruptor.