Saudis, Concerned about High Prices, ‘Quietly’ Raise Production

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Commentators and analyst are predicting a circus-like OPEC meeting tomorrow in Vienna as Iran takes the rotating presidency and the body stands on two sides of an open conflict for the first time in years. The Washington Post writes that OPEC’s meeting is likely to be packed with fireworks, but “little change is expected in policy.”

Maybe that’s because the change in policy has already happened, albeit quietly. Behind the buzz about the upcoming OPEC spectacle that will take place tomorrow, and subsequent talk that it will be all theater and little action, something very important is happening “quietly” in the background – Saudi Arabia is raising output levels to highs not seen since mid-2008, the Financial Times reports.

Javier Blas (FT):

“Saudi Arabia has been quietly increasing its crude oil production ahead of Wednesday’s meeting of the Opec oil cartel, in a sign that Riyadh is trying to bring oil prices down to more comfortable levels for consumers in the US, Europe and China…The kingdom boosted production in May by about 200,000 barrels a day and it is on course to increase it by another 200,000-300,000 b/d this month, taking its output above the critical 9m b/d level for the first time since mid-2008.”

The unilateral move signifies one crucial thing about Saudi oil policy that too often gets lost on media pundits and analysts: Saudi Arabia is interested in a lower oil price.

Why would anyone selling anything want lower prices? The answer lies in an economics term called “demand destruction.” Sell anything for too much, and buyers begrudgingly pay now but up their efforts to find the product cheaper elsewhere, or worse, swear off the product altogether.

Saudi Arabia sits atop 25% of the world’s proven oil reserves, and has invested hundreds of billions over many decades to make that oil accessible to the West and East with repeated increases in production capacity. Given that the petroleum sector accounts for roughly half of government revenues, ensuring an oil price that isn’t prohibitively expensive for consumers is a primary concern, for fear that an oil price too high would bring a windfall in the short term, but demand destruction in the medium to long term.

OPEC’s meeting tomorrow is very likely to be theatrical, and it is unclear if any major changes will come about from the meeting itself. But behind the scenes, and on their own, the world’s largest oil producer, Saudi Arabia, is doing something about high oil prices.