For what is arguably another seismic shift in a country known for its steadfast adherence to petrodollar orthodoxy, the MENA’s Guide has cited Saudi Arabia anew in doing away with the old benchmark of oil prices at or above $100 per barrel. This 180-degree change of policy indicates a deliberate policy switch of many international oil consumers from the luxury of high oil prices to maximizing market share for oil and this may redefine the global oil map.
Saudi Arabia A Shift in Strategy
For many years Saudi Arabia the largest oil exporter sought to maintain high prices for oil expecting strong receipts to fund its transformation agenda and other national projects including Vision 2030, an economic diversification plan. But as mentioned before the conditions within the international oil market are dynamic, and it is becoming very hard to retain high levels of prices.
The Saudi Arabia decision to move away from the $100 price target reflects several key factors:
Global Economic Headwinds: The downturn in global economic growth, and most importantly the areas that consume the most oil such as China and Europe have less demand for oil. The transition to renewable power sources and the adoption of EVs have contributed to the realization of the long-term estimated consumption of fossil fuels.
Competition from Other Producers: Some non-OECD countries such as the US, Russia, and some members of OPEC have started increasing production, flooding the market. For Saudi Arabia to remain the world’s leading supplier of oil, it has to concentrate on market share not price.
Geopolitical Considerations: Though Saudi Arabia has other confrontational relationships and allies it is beneficial to stabilize the market share that would help the country to establish new relations and make sure it remains an important reliable supplier in the international energy market that could be important while reconsidering power relations on the international level.
Boosting Market Share
Thus the new strategy of the Kingdom centers on the assertive defense of market share through increasing crude production rates when required to shield market share from rivals. Thus, by selling oil at cheaper prices, Saudi Arabia would not only increase the number of consumers of its product but also secure long-term contracts for their products in developing and fast-growing economies including India and the countries of South-East Asia.
This strategy also gibes well with Saudi Aramco’s plans to expand refinement capability and expand downstream petrochemical business position, seeking its position not only as a crude oil exporter but as a supplier of refined products and petrochemicals.
Effects on the Global Oil Market
Saudi Arabia’s shift is likely to have a ripple effect across the energy sector:
Downward Pressure on Prices: Saudi Arabia, in its attempt to act as a price setter, by pursuing a policy of holding the price down by selling large quantities of oil, could … contribute to the accumulation of oil in supply in the global market and hence keep price lower than it would otherwise be. This would work for the oil-importing countries but will be a challenge to those oil-exporting nations that rely on high prices.
Impact on U.S. Shale Producers: The new production entries such as the U.S. shale industry that enjoy better conditions in the form of high oil prices may experience some hitches. If Saudi Arabia pulls supply and lowers prices further, profitability can be a major issue for shale producers, with the latter having higher extraction costs compared to Saudi Arabia.
OPEC Cohesion at Risk: The move is also expected to challenge the unity of the Organization of the Petroleum Exporting Countries (OPEC) which includes Saudi Arabia. A number of member nations, especially those with relatively limited production capacities and relatively high breakeven points could oppose the strategy. But, Saudi Arabia which has a lot of influence inside the cartel also gets a lot of advantages.
Long-Term Implications
While attending to the short-term specifics such as supply and demand imbalances the long-term consequences of this change of policy are far-reaching. Saudi Arabia is banking on the ability to nail a position as a dominating power supplier even when there is a shift to renewable resources. In this way, the Kingdom can now increase its oil revenues through the higher volume to pay for its planned energy transition, the production of hydrogen, or solar and other renewable energy systems.
Perhaps, letting go of the oil price target is a sign that Saudi Arabia understands that this might also mean the end for the high oil prices. Most oil-dependent countries now risk their sources of revenue and grants in their attempts to eradicate climate change and proceed with the process of decarbonization in the global and national economies while these countries need to guarantee their economic stability for the short term and consider the possibility of having much lower oil demand in the future.
Conclusion
The move by Saudi Arabia this year to abandon its target of $100 for oil prices can be viewed as a strategic shift, given the growing competitiveness of the oil market, as well as the changes in the global economy. While shifting to a new complex world in energy consumption and production, this action proved the Kingdom’s intention to manage change and secure its future economy. This transition change will have serious ramifications for the entire global oil industry on prices, production plans, and geopolitical balances in the upcoming months and years.
