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Salman Says: Updated Saudi Strategy and The Global Market


The Kingdom of Saudi Arabia exerts more influence on the global price of crude oil than any other nation state. Oil analysts study Saudi policy and politics with as much attention to detail as financial analysts spend on US Federal Reserve meeting minutes. The current confluence of dramatic changes external and internal to the Kingdom merit examination. Any immediate internal policy shift or external geopolitical force that changes Saudi production affects global supply. Long term Saudi production and consumption trends influence how the world will use hydrocarbon energy.

What drives Saudi crude oil policy today?

Saudi Petroleum Minister Ali al-Naimi justified his veto of OPEC output productions on November 27, 2014 because it was “crooked logic” for low cost producers to sacrifice market share to support crude oil prices, a position reiterated at the June 5, 2015 OPEC meeting. Analysts looking for motives beyond maintaining market share have discussed three strategic drivers: 1) King Salman’s accession to the Saudi throne on January 23, 2) the growing geopolitical unrest surrounding the Kingdom, and 3) the accelerating innovation of North American shale operators.

How much oil can Saudi Arabia produce?

The Saudis state that the Kingdom can produce as much as 12 million barrels a day, a fact often repeated in the media. Paleo geology gifted the Middle East with a plurality of the earth’s oil and natural gas reserves. The US Central Intelligence Agency (CIA) lists the Kingdom as the 2nd largest source of proven crude oil reserves after Venezuela, with close to 269 billion commercially recoverable barrels as of January 1, 2014. Peak oil skeptics who predicted five years ago that the Saudis were running out of oil have been proven wrong.

How will internal politics affect Saudi crude oil production?

While King Salman’s decision to separate the Saudi Petroleum Ministry from Saudi Aramco has not changed crude oil production, Saudi consumer expectations and demographic change portend increased domestic consumption yielding less net crude for export. The Kingdom currently is a net importer of gasoline and diesel and continues to burn a substantial amount of crude oil to produce electricity.

Saudi efforts to diversify its economy from oil have not yet met projections. The recent decisions to open its stock exchange to foreign investors may induce greater economic diversity and cultural freedom to engender entrepreneurial innovation. Successful economic diversification would allow less concern about Saudi crude oil market share and more focus on long-term price stability.

Saudi social stability

Journalist Karen House argues in her work On Saudi Arabia that young Saudi Arabians will demand change as their generation emerges as a political force. Some analysts attribute the Kingdom’s decision to spend a record $229 billion with a 5% deficit despite lower per capita oil export revenues. While the Kingdom currently enjoys substantial currency reserves increased military and domestic spending could cause future larger budget deficits which leaves less bargaining room for long-term supply contracts with Asian and other buyers willing to take advantage of discount prices in the spot market.

Geopolitical Tension in the Persian Gulf and Arabian Peninsula

Saudi Defense Minister Mohammed bin Salman has reacted to the current tension throughout the Persian Gulf and Arabian Peninsula with an unprecedented military intervention in Yemen. Unclear is what threat, if any, ISIS may present. Any destruction of significant Saudi petroleum infrastructure by terrorist act would likely cause an immediate increase in the risk premium built into the global price of crude oil.

How Saudi strategy affects North American fracking

Whether the Saudi decision to hold production at its current level was meant to drive out North American unconventional competition is a matter of debate. The successful innovation and efficiency practices deployed by North American operators are not a matter of debate but of public record. Nimble operators are now using continuous improvement to produce more unconventional oil and gas with less capital investment than previously possible in the shale revolution.


While King Salman’s accession, the growing geopolitical unrest in the Arabian Peninsula and Persian Gulf and the accelerating innovation of North American shale operators all indicate reduced Saudi future influence on global crude oil markets, the current reality is that no other country yet controls the global supply to the degree wielded by the Saudis. Unless crude demand growth suddenly exceeds previous expectations, Saudi production decisions remain immediately market relevant for the near future.

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Tom Morgan

Tom Morgan is an Analyst for Drillinginfo. He has 20 years of experience practicing law with a focus on advocating for public policy to advance energy security and private property rights. Tom received his law degrees from Georgetown University and American University law schools. He hosts the weekly Drillinginfo Energy Minute, and you can find and connect with him on LinkedIn as Tom Morgan.