The Impact of Saudi Arabia on Global Oil Prices Should Not be Overestimated

Concerned about the problems of the global economy which suffers from high oil prices, Saudi Arabia offered its main customers in the US, Europe and Asia additional supplies of oil. As a result, it increased its production of oil to the 30-year maximum of 10m barrels a day, which situation triggered off the current drop in oil prices.

 

Brent oil which reached its 4-month maximum at the level of $117.5 a barrel last week, in the morning of September 20 cost only $107.8 a barrel. The drop which started from the beginning of the week was the largest one in the past three months.

It seems that Riyadh believes that the price of $100–$105 a barrel is acceptable to it and adjusts its supply in accordance with deviations from that price. It is to be noted that when in summer oil prices hit the level of $90 a barrel the kingdom declared about a reduction of oil supplies and that move caused a somewhat upward adjustment of oil prices.   

However, the influence of such powerful players as Saudi Arabia on ultimate oil prices should not be overestimated. If the demand in oil becomes weaker with the main oil consumers –specifically, debt problems will remain unsolved in Europe, the long-term economic growth rates slow down in China and the US will report growth in its commercial oil reserves – a more substantial reduction in global oil prices can be expected.   

None of the economies is able to change singlehandedly the situation on the global oil market a great deal as regards the supply or demand.  Large exporters will still be able to have an impact on the price within some limits of 3% to 5%, but only in a zone of some equilibrium value.

А.Yu. Knobel, PhD (Economics), Head of the Foreign Trade Department    
 

Thursday, 20.09.2012