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Does Saudi Arabia’s Play For Market Share Make Sense?

Public Policy

Props to Saudi Arabia. Unlike other producers, including U.S. shale producers, it maintained financial strength and flexibility during the last boom. When it began to shift the paradigm of global supply, the kingdom was explicit about its goal—market share—even if it didn’t always trumpet the proactive steps it was taking towards that goal. The now-evident objective of low prices, having been achieved and sustained, begs the question of why Saudi Arabia defended its market share.

The position of Saudi Arabia among producers in 2014 resembled the position of Germany in the European Union in prior years. Both had maintained financial strength despite the prodigal habits of other members, and both were called upon to make unique sacrifices to rescue their neighbors. Germany had closer ties to its partners and seemed to see the ultimate benefit of helping. Perhaps because it didn’t have such ties, Saudi seems to have weighed the benefits differently. Indeed, Saudi had no moral obligation or economic need to sacrifice itself in order to redirect wealth to other producers.

Their actions suggest that they intended to drive prices toward a basement price—stepping supply up when prices reached the $60s, slowly tuning it down when prices hit the $40s and below, and increasing its capacity for production even as prices fell. The recent address of Saudi Oil Minister Ali Al-Naimi in Houston was straightforward and polite, but it might be crudely paraphrased as, ”Get used to the low prices. Adapt or die.”

The possibility of his bluffing is belied by historical actions. As recently as Monday, the OPEC report on monthly volumes showed the kingdom continuing to produce more than half a million barrels a day above its rates in late 2014. Saudi Arabia has had the will and means to drive prices, giving market forces some push.

As oil has been its only resource and industry of value, the kingdom has treated the business as the treasure that it is. The centuries-long fate of the royal family and its kingdom depends upon how they manage themselves during the era of oil, particularly the epoch of increasing demand. Surely, the highly intelligent, disciplined and motivated planners knew the short-term consequences of the actions which the rest of the world is just beginning to appreciate fully. And even last month, Minister Al-Naimi professed the acceptability of $20 oil.

Normally the benefit of market share is obvious—increased revenue and increased performance. This assumes, however, stable prices and economies of scale. If one maintains market share, or even gains a few percent, but prices drop by 50 or 70 percent, then revenue drops to half or a third of what it had been. Said differently, the Saudis could have absorbed all of the increasing production from the rest of the world, dropped their production by half to about 5 million barrels per day (mb/d) and still have had the same or more revenue than they have enjoyed during this transition. Market share is not its own reward. Evidently Saudi Arabia has some strategic plan that results in its making more money in the long run than it is losing in the short run.

Perhaps the Saudis view ‘market share’ not just in terms of oil production but in terms of total energy use. By 2014 shale oil had posted an acute rise in supply, and other high-cost sources like oil sands were building momentum. Natural gas and renewables were tracking their own, chronic ascent. Moreover, the high cost of oil created incentives toward alternatives, both unconventional oil and non-oil forms, and global demand growth for liquid oil was forecast to grow below historical trends due to conservation and lesser economic activity. Minister Al-Naimi has said that oil demand would peak long before supply. Before the current price crash, that peak demand was within sight, perhaps 2040 give or take a decade. High prices were slowly killing the goose that lays the golden eggs.

If the strategic focus on market share does not involve increased revenue or efficiencies, then the market power is the only compelling explanation for the strategy. With power they can perhaps maximize their own decades-long revenue stream rather than passively treat their national treasure as a cash cow, perhaps exerting some control over their own destiny rather than ceding to less economically rational sources.

The new paradigm of supply/demand balance seems to have at least two major tenants: Price should be low enough to discourage run-away supply and perhaps to encourage the use of oil. Saudi Arabia may cooperate but will not unilaterally support prices. Around these pillars are two routes back to prices which can sustain long-term supply: slow rebalancing as supply slides and demand creeps, with cooperation for widespread cuts. Or prices could recover by a challenge to the new paradigm, namely conflict to threaten or to interrupt even a small portion of supply.

A freeze in production growth as headlined in the last month would be a mostly irrelevant step on the first route or a minor step towards the second route. The large majority of OPEC production comes from countries not able or not inclined to increase production. With Iran still adamantly and publicly opposed, the idea of a freeze in supply growth is more publicity than policy change. Perhaps the most important take-away is that Saudi Arabia has signaled that its floor price is somewhere above $30.

Even if cooperation cannot be achieved, the rest of the world may not remain a hapless victim of Arabian pricing power. Oil consumers may appreciate the drop, but countries like Russia and Iran do not. They also have motives and objectives similar to those of Saudi Arabia; they desperately need oil revenue. Only they have different forms of power at their disposal to influence oil price.

24 Comments on "Does Saudi Arabia’s Play For Market Share Make Sense?"

  1. makati1 on Mon, 28th Mar 2016 9:45 pm 

    Guesses and more words to get a paycheck. Boring! If you are going to waste time writing an article, write something new that makes the reader think. Not a rehash of 1,000 other articles. I don’t waste my time reading this regurgitated crap.

  2. marmico on Mon, 28th Mar 2016 9:55 pm 

    I can’t wait to read what rehashed crap ape will spew forth in rebuttal to this rehashed topic of an article. He’ll probably point out who’s doomed and who’s a cancer monkey and who’s an idiot. Yawn. Lame article. More lame comments to follow.

  3. Plantagenet on Mon, 28th Mar 2016 10:20 pm 

    Saudi Arabia’s market share strategy might make sense if oil production in Saudi Arabia wasn’t on the verge of peaking. Once the super-giant Ghawar oil field in KSA peaks and starts to decline then the oil glut is over.


  4. Plantagenet on Mon, 28th Mar 2016 10:25 pm 

    By coincidence FT has a story about KSA’s market share in today’s edition. Turns out KSA’s strategy isn’t working—-in spite of cutting their price they are still losing market share to Russia, Iraq and other producers.

  5. Apneaman on Mon, 28th Mar 2016 10:49 pm 

    marmi, I’m very flattered that you wait in anticipation and hang off my every word, but have you ever considered getting a hobby? Going on a date? Make a friend? Between me and Art Berman your cyber stalking schedule must be completely full.

  6. Practicalmaina on Mon, 28th Mar 2016 11:04 pm 

    Will Belgium keep its higher rate of Saudi oil as terrorism strikes the homeland?

  7. Truth Has A Liberal Bias on Mon, 28th Mar 2016 11:18 pm 

    “In the week ending March 18, the United States imported nearly 8.4 million barrels per day of crude oil, according to the U.S. Energy Information Administration”

  8. Practicalmaina on Tue, 29th Mar 2016 12:00 am 

    Yikes, and Saudi is up to burning 3 mill a day, I bet peak ac and desalination this summer shatters that record.

  9. Anonymous on Tue, 29th Mar 2016 4:29 am 

    It makes sense only if you swallow corporate media lies about ‘market share’ being the actual goal.

    It was never about ‘market share’. S.A. still has lots of what everyone wants, oil. If you look at it dollar terms, S.A., actions make zero sense. They do however, make sense once one realizes that dropping the price of oil is part of a much larger economic war, largely targeted at Russia and Iran. S.A. has deprived it itself of a lot of money and has achieved none of ‘its'(washingdum, Tel Aviv’s) goals. Yes, Russia and Iran have both been deprived of revenue as well, but there is a lot of hurt on both sides. Well, maybe not for the people rigging the market and their enablers, but anyone connected to the ‘energy industry’, definitely in North America, isnt have a great of it. But as americants like to say, collateral damage.

    This bullshit article completely sidesteps the entire issue of uS complicity of using oil as an economic weapon against those that refuse to bend knee to empire. The entire article is waste of electrons and meaningless verbiage.

  10. markisha on Tue, 29th Mar 2016 4:35 am 

    Woldnt they earn more if they sell , lets say 5mbpd at 100$ then 10mbpd at at 20$. This has nothing to do with market share

  11. markisha on Tue, 29th Mar 2016 6:14 am 

    I don’t think exactly mathematically to don’t get me wrong

  12. joe on Tue, 29th Mar 2016 8:43 am 

    Oh man, the scale of conspiricy theories!
    Saudi loses on sales but gains on domestic supply.

    Cheap oil, also means cheap, to them!
    Market share ironically means more money to them.
    For every barrel they pay 30 dollars for it means they are now exporting 3 barrels for. If they cut production to keep prices high, they lose big time, they would have to borrow to use their OWN oil, plus Iran and America would be exporting low volumes at massive profits.

    This is a peak oil problem, with a peak oil temporary solution!

  13. shortonoil on Tue, 29th Mar 2016 9:34 am 

    “It makes sense only if you swallow corporate media lies about ‘market share’ being the actual goal.”

    Does Saudi Arabia’s Play For Market Share Make Sense?

    Does the question make sense??????

    Over the last 68 years, and 100 billion barrels of oil Saudi Arabia has never produced one drop of oil that it could not sell!

    Ask a really, really stupid question, and someone is sure to come up with a really, really stupid answer!

  14. geopressure on Tue, 29th Mar 2016 9:57 am 

    Gonna be a bad week for oil prices…

    Jannet Yellen’s speach is about to strengthen the dollar & Cushing fake overflow approaching soon…

  15. rockman on Tue, 29th Mar 2016 10:58 am 

    I saw no point in reading any more after the first few lines indicating that the KSA acted to force oil prices down instead of the reality that the buyers cut the prices they were willing to pay. If the authors don’t understand that the buyers and not the sellers set the price of oil there’s no reason to listen to anything they say.

  16. practicalMaina on Tue, 29th Mar 2016 11:11 am 

    they sure influenced many folks decisions on vehicles or vacays or a bigger home. We are at a record in worldwide vehicle production right now, correct? Perfect time to manipulate the market so people have a false sense of security. Fracking could not drive the price down, so the old whore Ghawar had to do it.

  17. shortonoil on Tue, 29th Mar 2016 12:53 pm 

    “Fracking could not drive the price down, so the old whore Ghawar had to do it.”

    The best information available (which probably isn’t very good) tells us that Saudi exports are actually declining.

    Of course, the bought and paid for MSM is probably a better source o f information?

  18. practicalMaina on Tue, 29th Mar 2016 12:58 pm 

    Short if the winter I have experienced in my area is any indication, the ACs and desalination in Saudi are going to be very thirsty for oil this summer.

  19. shortonoil on Tue, 29th Mar 2016 3:55 pm 

    “Short if the winter I have experienced in my area is any indication, the ACs and desalination in Saudi are going to be very thirsty for oil this summer.”

    Saudi consumption has been increasing by 2.4% per year. Almost exactly what the Etp Model says it must. As their fields peak out their ability to export will go down, and they are probably at that point already.

  20. theedrich on Tue, 29th Mar 2016 8:29 pm 

    Ø says, “Jihadism is not Islamic.”  Could the KSA’s oil induce him to say that?  Given that the putrid black POTUS is noted for contorting the truth whenever possible, it behooves us to inquire into this assertion.  Consider the Mohammedan “holy” scriptures:  Quran 2:191, “And kill them wherever you find them”;  Quran 2:216, “Fighting is prescribed for you.”  Quran 4:74, “Let those fight in the way of Allah who sell the life of this world for the other.  Whoso fighteth in the way of Allah, be he slain or be he victorious, on him We shall bestow a vast reward.”  And so forth.

    As Andrew C. McCarthy reported in Imprimis (Feb 2016), the “Blind Sheikh” (Omar Abdel Rahman) who masterminded 9/11 was “ a globally renowned scholar — a doctor of Islamic jurisprudence who graduated from al-Azhar University in Cairo, the seat of Sunni Islamic learning for over a millennium.” Possibly Mr. Rahman knows a bit more about Islam than does the Big Burrhead.

    Never mind, of course, that Saudi Arabia, our oily “friend” in the Middle East, is the most disgusting and vile tyranny on the planet, outstripping even North Korea in its barbarity.  Its Sharia savagery is followed closely by other nations of the same creed — including, nowadays, Afghanistan, which we “rescued” from the Taliban.

    Moammar Gaddhaffi predicted:  ““We have 50 million Muslims in Europe, There are signs that Allah will grant Islam victory in Europe — without swords, without guns, without conquests.  The 50 million Muslims of Europe will turn it into a Muslim continent within a few decades.”

    But no matter, Whitey.  Don’t worry.  Be happy.  You won’t have any more problems after the holy followers of Allah have chopped off your head.  After all, the Negro-in-Chief has already told you that you have nothing to worry about:  jihadism is not Islamic.  So keep the oil flowing:  vote for Hotflash Clitory and import more Quran-obeying peaceniks.

  21. Anonymous on Tue, 29th Mar 2016 8:31 pm 

    Yes, it is the same thought behind the idea, why would the so-called ‘sauds’ sell a million Barrels of oil today for $25.00, or sell the same amount for 2-4 x’s that, with no extra effort at all. Simply market ‘magic’ at work. To go even further, why would anyone take their only (real)export of value, and drop it to 1/4 of its previous value-voluntarily at that?

    A: You dont. Unless your being pressured by some outside actor to do so, or you are being underwritten by some 3rd party, or lastly, you are just really really stupid and have no grasp of reality. Sure, actual market forces may force prices down over short terms, but in a non-rigged market oil market(if such a thing existed), oil would not drop to below so many producers break even point the way they have recently. Like you point out short, every single drop of oil Arabia has every extracted has found a buyer-no matter its price. So why ‘voluntarily’ take a bath on the only thing you have the world actually wants? The only other thing ‘sauds’ produce is highly skilled executioners. The only potential market for those would be america, and america has more than enough local talent when it comes to officially sanctioned murder. So no luck there. That just leaves, well, oil.

    So again, the sauds market share tale is about as credible as the tooth fairy, fat men with sleighs full of toys dropping down chimneys or free-market capitalism.

  22. Dooma on Wed, 30th Mar 2016 8:59 am 

    hey “three dicks” why don’t you stick to something like stormfront?

    Your racist babble is growing quite boring.

    This site is about peak oil and it’s associated ramifications.

  23. PracticalMaina on Wed, 30th Mar 2016 9:23 am 

    Anonymous I feel there is truth to what you are saying, but they also think they benefit from delaying oil saving measures internationally, with lower prices. Ultimately they are just cooking themselves.

    Theedrich who did 911 benefit, the Saudi Royals, an ally of Bush, and Halliburton. The only way it helped a Jihadist was the unnecessary invasions and resulting killings helped recruit more terrorist, and we left power vacuums everywhere. Mission accomplished, a whole region DE-stabilized, other than our favorite dictators of course. But do not worry, Iraq is going to start thanking us with huge volumes of oil very soon.

  24. joe on Wed, 30th Mar 2016 4:18 pm 

    Theedrich is crude and those words hurt, but they hurt because the contain a germ of truth. Islam is spreading throughout Europe, its also true the Islamic societies dont care much about personal freedom of expression and freedom oof life choice, which if you value those things makes you an enemy of a growing minority of muslims choosing to support Sharia leaning groups as a way of rebelling against the status quo of their own societies.

    Unfortunately for Theedrich hes an ignorant person, he misunderstands the truth about the region hes writing about. Syrians are a white people, most Turks are white, vast portions of Asia are blonde haired and blue eyed especially in places like Afghanistan, race is not the problem, its politics, and in particular religio-ideology.
    Racial superiority ideology was a lie, spread by people whom science has proven wrong.
    Islam is not the problem, the problem is driven exclusively by the modern globalist economy, the heady mix of commodities and ideology with a history begining in the earliest moments ofcthe story of oil and empires.
    Now we are reaping what we sowed when we first realised that gasoline could do more than light a home.

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