Saudi Arabia's Failed Oil War
Why Its Days of Market Dominance Are Over
Saudi King Salman’s ongoing visit to Asia, through which he hopes to attract Japanese and Chinese investment in Saudi Arabia, is another indication of how committed the country is to reforming its economy. This trip, along with a host of fiscal modifications at home and the impending initial public offering (IPO) of Saudi Aramco, the country’s national petroleum and natural gas company, underscore the Kingdom’s recognition of its need to escape dependence on oil—a realization that has come as a result of failed policies from 2014 to 2016 that forced Riyadh to accept the fact that its days of dominating oil markets are over.
Saudi Arabia’s strategy during the production war was to let the spigots flow in the hopes that doing so would undermine two other producers: Iran and the United States. Iran had always enjoyed a latent ability to wrest market control from Saudi Arabia, but crippling international sanctions prevented it from doing so. After the nuclear deal, though, the threat to the Kingdom increased. At the same time, the U.S. oil industry presented a new challenge. By 2015, after a decade of technological innovations, including the use of wireless seismological testing and the automating of various oilrig functions, it had claimed the mantle of global production leader from Saudi Arabia.
In the face of eroding market share, Riyadh refused to cut oil production. It instead opted to increase output in 2016—setting new records for its production levels—to keep global supply high and prices down. In so doing, Riyadh wagered that it could survive depressed prices with its over half a trillion dollars in foreign exchange reserves, while its U.S. and Iranian competitors would in turn face so much financial pressure that they would bow out of the running. This was a marked divergence from past Saudi strategy, which typically favored cutting production to regulate supply and keep prices elevated.
The Kingdom’s production war was costly. The resultant oil price slump hurt SaudiRead the full article on ForeignAffairs.com