first time<\/strong><\/a> since May 2009. Observers have attributed the drop to both an increase in supply, resulting from the shale revolution in the United States, and a decrease in demand, owing to sluggish global growth. All eyes have been on the Kingdom, which houses roughly 73 percent of the world\u2019s proven oil reserves, to cut back its production and help stabilize prices. But Riyadh has refused to play ball, breaking from its traditional preference for high prices, in order to keep pumping.<\/p>\nAlthough some analysts are puzzled by the Saudi strategy shift, pure economic logic may well be driving Saudi behavior: As its competitors struggle to keep production going, Riyadh is likely looking to increase its global market share\u2014trying to avoid the mistakes made during previous wild oil price swings. Keeping prices\u00a0in the $50\u201360\u00a0range for\u00a0a year or two\u00a0would have major repercussions. Investment in the U.S. oil and gas sector declined by 37 percent last year and it could fall further there, as well as elsewhere. More cheap gas could also increase consumption and make energy-efficient vehicles, as well as wind, solar, and nuclear power, less cost-competitive. Reducing global competition now, then, might pave the way for steep price increases in the future.<\/p>\n
Still, it\u2019s hard to believe that the Saudis did not consider the geopolitical repercussions of their bold gambit. Lower oil prices will mean lower revenues for competing petro-states, two of which\u2014Iran and Russia\u2014are longtime rivals. If a drop in prices politically destabilizes governments in Tehran and Moscow, Riyadh\u00a0certainly wouldn\u2019t lose any sleep.\u00a0What\u2019s more, cheaper\u00a0oil could put\u00a0more pressure on Iran to reach a nuclear deal and Russia to roll back its operations in Ukraine.<\/p>\n
Yet in the end, the motivations behind the Kingdom\u2019s new oil strategy matter less than its likely outcomes, some of which could be quite negative.<\/p>\n
Despite Saudi Arabia\u2019s considerable pricing power, U.S. oil and gas production will probably slow for a time but eventually bounce back. The effects will vary\u00a0from one\u00a0location to another;\u00a0only some U.S. shale fields can still make a profit when oil is in the $50\u201360 range. U.S. shale oil will still benefit from the advantage of being \u201csweet\u201d crude, meaning that it is easier to refine and store than Saudi Arabia\u2019s \u201csour\u201d crude. And with the Saudi commitment to balancing prices in question, shale producers\u00a0could come to replace the Saudis as the world\u2019s \u201cswing producers,\u201d capable of redressing mismatches in supply and demand.<\/p>\n
Causing pain in Tehran and Moscow won\u2019t necessarily result in concessions or cooperative behavior. It may even have the opposite effect. Iran could double down on its support for Syrian President Bashar\u00a0al-Assad and\u00a0its efforts to expand\u00a0Shia\u00a0influence to the Mediterranean\u00a0and the Arabian Peninsula. And Russian President\u00a0Vladimir Putin could stir up national support by blaming Russia\u2019s imploding economy on a U.S.\u2013Saudi conspiracy to overthrow his regime. Even now, despite a precipitous fall in the value of the Russian ruble, there are few signs that Putin is ready to withdraw his forces and equipment from eastern Ukraine.<\/p>\n
The biggest risk associated with Riyadh\u2019s oil strategy is domestic. An $89 billion revenue loss in 2015, assuming the price of oil hovers at $55 a\u00a0barrel, will not lead to a social revolution. But sharp cuts in welfare spending and salaries for government workers, which account for 50 percent of budget spending, could have unpredictable consequences. Indeed, an increase in unemployment could undermine the Kingdom\u2019s stability much sooner than its leaders expect. Throw in incitement by a vengeful Iran in Saudi Arabia\u2019s Shiite-majority and oil-rich Eastern Province, and Saudi worries multiply. That said, Saudi officials have privately told diplomats and industry analysts they have enough foreign currency reserves, some $750\u00a0billion, to weather any short-term financial storm and prevent big budget cuts.<\/p>\n
Governments typically\u00a0make big bets either\u00a0when they are overly\u00a0confident or increasingly worried. Saudi Arabia\u2019s oil strategy\u00a0doesn\u2019t reflect confidence.\u00a0With\u00a0the frail health of King\u00a0Abdullah,\u00a0possible succession\u00a0rivalries,\u00a0domestic pressures for change, conflict\u00a0in neighboring Yemen, and the many challenges\u00a0posed by ISIS,\u00a0Riyadh\u00a0may be in for more than it bargained for.\u00a0It has chosen an odd time\u2014one of tension, chaos, and uncertainty\u2014to launch its boldest initiative in the geopolitics of oil since\u00a0its oil-for-security bargain with U.S. President Franklin Roosevelt in 1945.<\/p>\n
Go to Original \u2013 foreignaffairs.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Although some analysts are puzzled by the Saudi strategy shift, pure economic logic may well be driving Saudi behavior. Yet in the end, the motivations behind the Kingdom\u2019s new oil strategy matter less than its likely outcomes, some of which could be quite negative.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[146],"tags":[],"class_list":["post-52212","post","type-post","status-publish","format-standard","hentry","category-economics"],"_links":{"self":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/52212","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/comments?post=52212"}],"version-history":[{"count":0,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/52212\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media?parent=52212"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/categories?post=52212"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/tags?post=52212"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}