Saudi Arabia, Russia, And The Price Of Oil

In today's Financial Times there is a long article, "Riyadh's Gamble," by Anjit Raval that discusses the details of how the Saudi decisionmakers regarding oil, led by Oil Minister, Ali al-Naimi, came to decide not to cut production to hold up the price of oil.  The general thrust of this is well known, that as the price fell last year, all the other producers called on them to cut production as they had done in the past.  But they did not do so.  One tidbit in the article is that through September the debate continued within Saudi Arabia, but that the first sign of their new stance came on October 7 when an assistant to al-Naimi, Nasser al-Dossary, at a meeting in New York at Mike's Bar with a group of energy policymakers, responded to a comment that "Of course you're going to cut production," with "What makes you think we're going to cut?"  Ooooh, the price slid hard after that leaked out.

The final settlement on this came at an OPEC meeting on November 27 when the Saudis convinced the group as a whole not to cut production to let the higher cost producers bear the brunt and lose market share, with the Saudis openly stating that they were not going to be the world's patsies on this anymore (not their precise language) and lose market share while propping up rivals.  A crucial point of the article is that this has had nothing to do with orders from the US or political games.  This has been very strictly business.

The previously unreported bottom line on this came a few days prior to the OPEC meeting.  There was a last moment when the Saudis might have been willing to cut production.  But, they were not going to do it by themselves.  They had to take at least one other really large producer and exporter with them (the US is one of the top three producers, but does not export).  That other member of the top three is Russia, and al-Naimi apparently had a meeting with top oil officials from Russia and Mexico just prior to the OPEC meeting.  He reportedly suggested to the Russian official that they both engage in a simultaneous and equal cut, given that they are about equally sized in production.  The Russian official said no, so al-Naimi said, enjoy the outcome (actually what he said was not recorded).  In any case, Russia has taken a much larger economic hit than Saudi Arabia, and while many have claimed that this was the Saudis playing some US-inspired anti-Russian game, this looks much more like the Saudis just playing market hardball.  After all, among those suffering from the price fall have also been shale and other high cost producers in the US (and Brent is now back down to $56 per barrel while WTI is back down to $48 per barrel).  Fun stuff.

Barkley Rosser