Understanding the unlikely Saudi Arabia push for lower oil prices

By Javier Blas  Cartels have one — and only one —raison d'être: Push prices higher. Organization of the Petroleum Exporting Countries (Opec), the most famous of all of them, is a textbook example. So why is Saudi Arabia, which leads the group, driving prices down? Ostensibly, the kingdom is trying to reestablish discipline among rogue producers: Kazakhstan, Iraq and the United Arab Emirates are cheating on their output targets. To force them to relent, Riyadh is voting at Opec+ meetings for higher production for the whole group, hoping that the ensuing price decline forces the troublemakers into line. 

The explanation makes a lot of sense. First, because the cheating is real, it’s getting worse and the unruly countries have ignored warnings. Second, because Saudi Arabia has done it before, launching price wars against Opec cheaters in 1985-86, 1998 and 2020. Yet, I’m unconvinced that's all there's to it. 

 

To appreciate Saudi oil policy, it always helps to focus on what the kingdom does, rather than on what it says — whether in public or private. The doing is quite transparent: Higher production, which results in lower oil prices. Importantly, Riyadh has made no effort to talk up the market. In fact, the opposite is true. In recent days, the Saudis have quietly sent a message to others in Opec and beyond:  We can live with low oil prices. And reading between the lines, Riyadh seems to be aiming to keep Brent crude below $70 a barrel, and perhaps even lower, a significant departure from its previous so-called Saudi First policy of sustaining prices as close to $100 as possible.

  Understanding the new approach is critical ahead of the next meeting of the group of eight Opec+ countries, scheduled for May 5. The desire to punish the cheaters is one explanation for the shift. But Kazakhstan sounds more like collateral benefit of a new policy rather than its main reason. Saudi oil policy is multidimensional: It may have several objectives at once. So here are some educated guesses about Riyadh’s key considerations:  (1) Saudi Arabia has realised its previous policy of “as close to $100-a-barrel as possible” was unsustainable as it would require further production cuts. To sustain high prices, Saudi output last year was the lowest since 2011. If Riyadh had maintained the policy of high prices, it probably wouldn’t be able to increase production in either 2025 and 2026. 

(2) Saudi Energy Minister Prince Abdulaziz bin Salman has long acknowledged, at least in private, that Riyadh had benefited from US sanctions on two Opec+ rivals: Iran and Venezuela. If either was producing anything close to their pre-sanctions level, Saudi Arabia would have long confronted lower prices or lower production — or both. Prince Abdulaziz has also operated under the assumption that the sanctions wouldn’t last forever. If Riyadh feels that day is approaching — say because the White House is negotiating with Tehran — it probably would help to increase production ahead of potential Opec+ negotiations about how to handle the return of currently idle capacity.

  (3) Saudi Arabia doesn’t only fight price wars against Opec+ rivals; historically, it has also battled external producers — the biggest being the US. In 2014-16, it flooded the market to crush US shale producers. Famously, former Saudi oil minister Ali al-Naimi told American drillers in February 2016 they could “lower costs, borrow cash or liquidate” in the face of sub-$50-a-barrel prices. But declaring another price war against shale would be politically difficult for Riyadh. True, Donald Trump wants lower oil prices, even if that hurts its domestic energy industry. But I’m not sure American lawmakers — think of Senator Ted Cruz of Texas and Lisa Murkowski of Alaska, for example — agree.

  (4) For nearly a decade, Saudi Arabia has worked closely with Russia. But that relationship, which admittedly has lasted longer than many initially anticipated, feels more transactional than strategic. Russian President Vladimir Putin is courting Mr Trump, and Moscow could one day turn its back on Riyadh. Perhaps the Saudis sense a change in tone in the Kremlin and are hedging their bets, increasing production before an actual split emerges.

  (5) Finally, the Saudis are in talks with the US about several issues: Defence guarantees, weapons contracts, Iran and a Saudi civilian nuclear programme. Oil surely plays a role in those talks. Mr Trump is heading to Riyadh in May, making the country part of his second foreign trip (the first one was the unscheduled trip to Rome for the Pope’s funeral).

  Ultimately, many of those considerations will inform the Saudi rationale to let oil prices drop. One of them will be the main driver, while the others would be collateral benefits. Keeping Kazakhstan in line is more likely among part of the latter than the former.