Saudi Arabia's Oil Price Dilemma: Between a Rock & a Hard Place

Abstract

Saudi Arabia is in a dilemma over the oil price. It could not go back to its failed oil strategy of flooding the global oil market. Nor could it manage to persuade other OPEC and non-OPEC oil producers to agree further deeper cuts because they will refuse. Furthermore, Saudi Arabia does not want to end up carrying the burden of further cuts on its own as it loses both income and market share. And to add to its woes, Russia is now saying that the Russian economy can actually live forever with an oil price of $40 or less. This raises the question as to how long will Russia continue to abide by the production cuts’ agreement signed with OPEC. And without higher oil prices, the Kingdom faces an imminent financial crisis. If Saudi Arabia’s economic reforms which include the Initial Public Offering (IPO) of Saudi Aramco, Vision 2030 and OPEC production cuts, all fail, which is likely, then Saudi Arabia may have to consider other alternatives to push the oil price up and also to distract from the deteriorating economic situation in the country. My paper will argue that despite the current low oil prices, nobody is paying enough attention to the fast approaching oil supply gap predicted in 2020 with significant oil price hikes. It will also argue that a diversification of the Saudi economy with the utmost speed is not a luxury but an absolute necessity. The paper will maintain that it is far more economical and beneficial and strategically desirable for Saudi Arabia to talk to Iran rather than invite a potentially devastating war to the Gulf region or embark on external military adventures in order to lift the oil price. Moreover, by talking to each other, Saudi Arabia and Iran could devise a way to push the oil prices up to their mutual benefit and also the benefit of other oil producers in the Gulf. The paper will conclude that as long as oil holds a central place in the global economy, geopolitics will not be far off from macroeconomics.