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Why Does Saudi Arabia Seem So Comfortable With Falling Oil Prices?

U.S. Secretary of State John Kerry speaks with Saudi King Abdullah bin Abdul Aziz al-Saud as the Saudi ambassador to the United States, Adel al-Jubeir, listens before a meeting at the Royal Palace in Jiddah, Saudi Arabia, on Sept. 11. (AFP/Getty Images)

Oil prices continue to tumble: down about 25 percent since mid-June to a four-year low, and many analysts believe there is no end in sight.

While that's good for consumers and most businesses in the U.S., the falling price is bad for oil-exporting countries such as Russia, Venezuela, Iran and Iraq.

And blame — or credit — for the plummeting prices is falling squarely on Saudi Arabia.

The kingdom, often called the "central banker of oil," is still the key player in oil prices, says Rachel Bronson, author of Thicker Than Oil: America's Uneasy Partnership with Saudi Arabia.

"The Saudis have shown themselves to use oil politically throughout their recent history. They're quite good at it; they think of oil as a strategic commodity and kind of their key lever of influence globally," says Bronson, a senior fellow with the Chicago Council on Global Affairs.

Normally when oil prices begin to slide, she says, Saudi Arabia will step in and slow production, which will help bring up the price.

But not this time: The Gulf state hasn't made any move to reduce oil production.

Jim Krane, an energy expert with Rice University in Houston, says because it hasn't given any indication why, figuring out Saudi Arabia's motives is creating something of a parlor game.

"If you're somebody who looks at geopolitics and energy, you could come up with any number of ways or any number of reasons why the Saudis are not doing what they would usually do," says Krane.

"There [are] lots of good reasons for them to keep on producing, but exactly why they're doing it, probably only a few dozen people in Saudi Arabia know that," he adds.

One popular conspiracy theory is that Saudi Arabia is trying to deprive Russia of valuable oil revenues because of its support of Bashar Assad's regime in Syria. Saudi Arabia is opposed to Assad.

Another target is its archrival in the region, Iran. Bronson says the low oil prices are hurting Russia and Iran, both of which depend heavily on oil exports and require higher prices than Saudi Arabia does to meet all their domestic needs.

"The Saudis are always mindful of oil prices. They always try to keep the oil prices high enough for them to cover budget, but low enough to hurt the Iranians," says Bronson.

Another theory is that Saudi Arabia is manipulating the markets to try to quash competition, especially from new oil producers like those involved with the Canadian oil sands and the shale revolution in the U.S., says Krane.

"They figure if prices go down and they help them go down a little bit, some of these people will be forced out of the business and the Saudis will be able to maybe scare some people away and retain their market share," he says.

Krane says demand for oil has fallen off in Europe and Asia — China especially — and there are more exporters vying for a smaller piece of the market.

The Saudis went through this before, in the 1980s, when there was a surplus of oil. The kingdom cut production, which stabilized prices, but then had to fight to gain back that market share in the years that followed.

Amrita Sen, chief oil analyst at Energy Aspects in London, says Saudi Arabia doesn't want the same thing to happen again.

"There has been a lot of market share taken away from them in Asia, which is their biggest market, because of discounted crude from Iraq and Iran. And that is something that has been a nagging problem for them," she says.

Saudi Arabia has $500 billion in reserves, and unlike many other oil exporters in the global energy market, says Sen, has the ability to ride out the low prices.

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Transcript

ROBERT SIEGEL, HOST:

And now the politics of oil, specifically the Saudi factor. Oil prices are down about 25 percent since mid-June, and a lot of analysts think prices will fall further. At the pump, that's a win. But the drop is painful for many oil-exporting nations, including Russia, Venezuela and Iran. NPR's Jackie Northam explains why the finger of blame is pointed firmly at Saudi Arabia.

JACKIE NORTHAM, BYLINE: There are a lot of up-and-comers, potential rivals and plain old wannabes in the global energy market. But when it comes to oil, Saudi Arabia is still the undisputed king of the hill, says Rachel Bronson, the author of "Thicker Than Oil: America's Uneasy Partnership with Saudi Arabia."

RACHEL BRONSON: Yes, Saudi's always a central player and usually the central player in oil prices. So Saudi Arabia's been called the central banker of oil.

NORTHAM: And because of that, all eyes are on the kingdom as oil prices continue to tumble, says Bronson.

BRONSON: The Saudis have shown themselves to use oil politically throughout their recent history. They're quite good at it. They think of oil as a strategic commodity, as their kind of key lever of influence globally.

NORTHAM: Bronson, a senior fellow with the Chicago Council on Global Affairs, says normally when oil prices begin to slide, Saudi Arabia will step in and slow production, which will help bring up the price or vice versa, but not this time. The Gulf State hasn't made any move to reduce oil production.

Jim Krane, an energy expert with Rice University in Houston, says because it hasn't given any indication why, figuring out Saudi Arabia's motives is creating something of a parlor game.

JIM KRANE: (Laughter) It really is, yes. You know, if you're somebody who looks at geopolitics and energy, you could come up with any number of ways, you know, or any number of reasons that the Saudis are not doing what they would usually do. And there's lots of good reasons for them to keep on producing, but exactly why they're doing it, probably only a, you know, few dozen people in Saudi Arabia know that.

NORTHAM: One popular conspiracy theory is that Saudi Arabia is trying to deprive valuable oil revenues to Russia for its backing of the Bashar al Assad regime in Syria. Another target: it's arch-regional rival, Iran. Bronson says the low oil prices are hurting both Russia and Iran, which depend heavily on oil exports.

BRONSON: They need higher prices than Saudi does to meet all of their domestic needs. So the Saudis are always mindful of oil prices, and they always try to keep the oil prices high enough for them to cover budget but low enough to hurt the Iranians.

NORTHAM: Another theory is that Saudi Arabia is manipulating the markets to try and quash competition, especially from new oil producers like those involved with the Canadian oil sands and the shale revolution here in the U.S., says Krane.

KRANE: They figure if prices go down and they help them go down a little bit, some of these people will be forced out of the business, and the Saudi's will be able to maybe scare some people away and retain their market share.

NORTHAM: Krane says demand for oil has fallen off in Europe and Asia - especially China. And there are more exporters vying for a smaller piece of the market. The Saudis went through this before in the 1980s when there was a surplus of oil. It cut production, which stabilized prices. But the kingdom had to fight to gain back that market share. Amrita Sen, chief oil analyst at Energy Aspects in London, says Saudi Arabia doesn't want the same thing to happen again.

AMRITA SEN: There has been a lot of market share taken away from them in Asia, which is their biggest market, because of discounted crude from Iraq and Iran. And that is something that has been a nagging problem for them.

NORTHAM: With a half-a-trillion dollars in reserves, Saudi Arabia has the ability to ride out the low prices, unlike many other oil exporters in the global energy market. Jackie Northam, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

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