Global oil prices have decreased substantially over the past few months, causing an issue for many Middle Eastern countries that rely on revenue from oil production. However, one of the major players in that industry, Saudi Arabia, have indicated that they feel things are just fine the way they are. Officials in Saudi Arabia have demonstrated that they are less likely to reduce oil production than to accept the lower profits for the time being.
A drilling frenzy in North America and falling demand in Europe, Japan and much of the developing world have been pinpointed as the causes of the price decline. The United States has increased its oil production by 70 percent since 2008. The increase in production in the United States have reduced imports by the OPEC members by 50 percent. Those oil supplies are now sold on the Asian markets, where buyers are demanding lower prices.
Ali al-Naimi, the Saudi oil minister, stated that there was no need to fear the drop in the price of oil. However, this view was challenged by billionaire investor Prince Alwaleed bin Talal, who penned an open letter to Ali al-Naimi criticizing him for his statement and claiming that the price drop could harm the kingdom’s budget. Some analysts believe that the country will not be able to withstand the lower prices for long and will have to support raising prices to manage high levels of social spending at home.
Some are accusing Saudi Arabia of deliberately depressing prices to damage rivals like Iran. Saudi Arabia has large financial reserves and low debt, which may help it weather the price decline better than its rivals. It is also believed that the acceptance of the lower oil prices is a signal to the other OPEC partners that they will all need to cut production together if they want prices to rise again.
In the early 1980s, Saudi Arabia responded to a similar situation by cutting production to reduce supply and increase prices. The result was a significant loss of market share that took the country years to recover from. Today, Saudi Arabia is taking the opposite tactic by accepting lower prices to keep its market share.