Riyadh's Oil Play

Why the Kingdom is Keeping Prices Low

King Abdullah at his private residence in Jeddah, June 2014. Brendan Smialowski / Courtesy Reuters

On Monday, a Saudi general and two border guards died in a shootout along the Iraqi–Saudi Arabian border with fighters thought to be members of the Islamic State of Iraq and al-Sham (ISIS). The attack—the first against Saudi Arabia since it joined the U.S.-led coalition against ISIS—came amid uncertainty both at home and abroad, over questions surrounding the health of 90-year old King Abdullah, who is in the hospital battling pneumonia, and over the global price of oil.

Oil prices recently dipped below $50 per barrel for the first time since May 2009. Observers have attributed the drop to both an increase in supply, resulting from the shale revolution in the United States, and a decrease in demand, owing to sluggish global growth. All eyes have been on the Kingdom, a leading producer in OPEC, which accounts for roughly 73 percent of the world’s proven oil reserves, to cut back its production and help stabilize prices. But Riyadh has refused to play ball, breaking from its traditional preference for high prices, in order to keep pumping.

Although some analysts are puzzled by the Saudi strategy shift, pure economic logic may well be driving Saudi behavior: As its competitors struggle to keep production going, Riyadh is likely looking to increase its global market share—trying to avoid the mistakes made during previous wild oil price swings. Keeping prices in the $50–60 range for a year or two would have major repercussions. Investment in the U.S. oil and gas sector declined by 37 percent last year and it could fall further there, as well as elsewhere. More cheap gas could also increase consumption and make energy-efficient vehicles, as well as wind, solar, and nuclear power, less cost-competitive. Reducing global competition now, then, might pave the way for steep price increases in the future. 

Still, it’s hard to believe that the Saudis did not consider the geopolitical repercussions of their bold gambit. Lower oil prices will mean lower revenues for competing

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