Saudi best advised to keep pumping oil, says new study

In a falling market, Saudi Arabia is better off not cutting its production, according to a recent study by the Oxford Institute for Energy Studies. 

The paper ‘The Dynamics of the Revenue Maximization– Market Share Trade-Off’ analysing the oil policy options for the Kingdom in a falling oil-price regime, observes that ‘with the advent of US shale, OPEC and Saudi Arabia have entered uncharted territory where it is still learning about a new source of supply and its responsiveness to price signals.’

When oil prices are falling, and as the US shale oil industry is believed to be a prime reason for the same, scuttling the traditional role played by Saudi and OPEC in controlling the supply dynamics, Saudi has little reason to curtail production, the report says. 

As the market is still uncertain about the elasticity of the US Shale industry to the change in oil price, that is the propensity of US shale production to decrease or increase in tandem with the oil price, the payoff calculation of the changes in Saudi’s oil strategy needs to follow the form of decisions-under- uncertainty.

The behaviour of OPEC countries and other oil producing countries also adds  to the uncertainty for Saudi. This gives the Kingdom less incentive to cut production at times of falling prices, the study says. The US oil rig counts have recently seen some steep falls and are noted by industry observers as a sign of wilting by the US oil industry in the face of current price pressure. 

The study notes that this decline will only reflect as decreased production after a lag of many months, but technological advances might 

have resulted in efficiency gains by the US producers negating such a possibility.

Such lack of clarity in global supply demand of oil means the Kingdom is formulating policies under a lot of uncertainty, the researchers added in the study.

It formulated various possibilities of elasticity of US Shale production to Saudi output and the behaviour of other oil producing nations, and concluded that the best course of action for the Kingdom, in a low price regime, is to keep the oil tap flowing. 

Reported by: