Oil in Saudi Arabia and Royal Succession

"Wow!  Gas is really cheap these days." -Everyone


On Friday, Saudi Arabia's King Abdullah bin Abdulaziz was admitted to a hospital in Riyadh, the capital of the Kingdom of Saudi Arabia.  Several days later, his condition appears stable, but concerns about the future of the world's largest oil producer remain.  At the respectable age of ninety, questions about the royal succession are being raised.  But first, let's get into Saudi Arabia's unique status in the world petroleum market. 


Saudi Arabia has used its substantial oil production capacity to great effect.  Saudi's current oil production usually hovers around 10-12 million barrels per day, and the Kingdom has the infrastructure already in place to produce upwards of 15 million barrels per day (maybe even more, the exact production capacity is a closely-held secret).  Rather than produce at their maximum capacity right away, Saudi Arabia changes how much it produces to help raise or lower the price of oil.  This is why many consider Saudi Arabia to be the "swing producer" of the oil market: they can increase or decrease production as needed to influence the global oil market.


This "oil weapon" has been used several times by the Kingdom.  The 1973 oil embargo, a retaliation for America's resupply of Israel in the 1973 Arab-Israeli War, is the most well-known example.  However, Saudi Arabia also spiked production in the late 1970s to put pressure on Iran (which Andrew Scott Cooper argues in The Oil Kings helped trigger the 1979 Iranian Revolution).  On the positive end, Saudi Arabia vastly increased its production during the Iran-Iraq War of the 1980s as a means to stabilize the market and prevent another oil crisis.


So what's up with Saudi Arabia's (and OPEC's) decision to allow oil prices to keep dropping?  Keep in mind, Saudi Arabia could bring prices right back up at any time by cutting its production.  There is plenty of (in my opinion justifiable) speculation that the decision to let prices fall is a move designed to hurt Saudi's rivals.  Both Iran and Russia are under U.S. sanctions and rely heavily on petroleum exports to make money.  The combination of these two factors is already pushing Russia into a recession and has continued Iran's economic woes.


Others (see Middle East Policy Council link below) suggest this move has more to do with cutting off the development of shale oil, which is much more expensive to produce.  Personally, I do not think that an industry as potentially profitable as shale oil is going to be stopped or substantially slowed just because the price of oil is low for awhile.  Still, Saudi Arabia and other wealthy petroleum nations can afford to keep prices low for quite awhile, and are free to start bringing the price back up when needed.


Will the eventual succession of King Abdullah throw a wrench in this process?  Probably not.  The Kingdom already has a solid plan in place for royal succession and has been preparing for a possible transition for years.  At most, it would likely only stall the price decrease or slightly increase prices for a few days.  Heir apparent Prince Salman is likely going to continue the current high production, and any slight increase would come out of instability fears which always occur during transfers of power.


For now at least, it looks like we can enjoy these low gas prices for a while longer.  At least until OPEC meets up again later this Spring.  Let's not forget, however, that continuing to rely heavily on such a volatile resource causes economic and environmental problems in itself.  Eventually, prices will rise again, and the only way to end our dependency on oil is to develop cleaner, cheaper alternatives.


TL;DR: Whether Saudi Arabia is trying to cause economic damage to its political adversaries or its energy competitors, it looks like oil prices will continue to stay low regardless of who is leading the country.



Andrew Scott Cooper: The Oil Kings

Middle East Policy Council on Oil

Article on Abdullah in Riyadh Hospital