Realist, not conformist analysis of the latest financial, business and political news

Empty Threats – Saudi Arabia Cannot Damage The Global Economy

There’s an idea that if we’re all beastly to Saudi Arabia over the killing – as alleged – of a dissident then they’ll somehow take it out on the world economy. This isn’t going to happen for the simple reason that Saudi Arabia just isn’t important enough to the global economy to be able to take things out on it. Yes, sure, they’re a big supplier of oil. But they’re no longer the swing supplier. That’s the American frackers who are. We could most certainly have some temporary glitches but Saudi just doesn’t have power even into the medium term, let alone the long.

He said Riyadh was weighing up 30 measures designed to put pressure on the US if it were to impose sanctions over the disappearance and presumed murder of Jamal Khashoggi inside the country’s Istanbul consulate. These would include an oil production cut that could drive prices from around $80 (£60) a barrel to more than $400, more than double the all-time high of $147.27 reached in 2008.

This would have profound consequences globally, not just because motorists would pay more at the petrol pump, but because it would force up the cost of all goods that travel by road.

No, except in the very short term the Saudis just don’t have that power.

Yes, oil is a global business, it’s also a fungible commodity. Prices are set by that of the marginal barrel. So, Saudi restricts output – something they’d have to be careful about given their own revenue needs – and the price would bounce. But for how long? Well, actually, some few months. Much American fracking for oil is profitable at current prices. At $400 they’d be squealing with glee at the profits to be made, oodles of cash piling up. And this is the thing, fracking has entirely changed the economics of oil. We now have elastic supply in a manner we never did before.

Meantime, fracking, a disruptive technology, makes low-cost manufacturing of oil and gas possible. The process began on a small scale. Over time, the technology’s application evolved in the same way as PC use. Productivity has increased sharply as per-unit output costs declined, which is what happens in all manufacturing process. The relatively modest investment required to build a crude oil manufacturing plant (otherwise known as a fracking rig) guarantees that fracking will be a permanent and ubiquitous feature of the oil and gas business just as the PC is in the computing world.


Far from that traditional resource model of projects becoming ever more expensive we’re now in a low capital consumption and highly reactive world. Any resumption of high oil prices is just going to see those fracking wells increase in number and thus production to come into the market. In effect Saudi is no longer the swing producer and no longer the price determinant on the upside. If Saudi did restrict production to raise prices the major beneficiaries would be those shale drillers.

They’ve just not got the power, the Saudis, the drive the oil price up to $400 a barrel for anything more than a few months. It’s an empty threat therefore.

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5 years ago

Could Saudi really make a significant (>$10bbl) difference to the price for even a few months? Saudi output is ~10M bbl/day. Various US shale companies have been drilling and capping during the recent relative softness in oil prices on the basis that they don’t want all that expensive equipment just sitting there doing nothing and they do want to be able to pounce get in straight away on any price increases. North Dakota alone could increase production by 200k bbl/day (or 2% of Saudi output) in a couple of *weeks* (provided Amtrak can get their act together to transport the… Read more »

Quentin Vole
Quentin Vole
5 years ago
Reply to  Moosealot

An anorak writes: Amtrak is the US national rail passenger service. Shifting the oil would be down to BNSF etc.

Hector Drummond
Hector Drummond
5 years ago

How much of this is also due to fears about the Middle East becoming ‘unstable’?

Surreptitious Evil
Surreptitious Evil
5 years ago

Becoming? I think you got the scare quotes in the wrong place.


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