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By Robert Rapier on Oct 28, 2007 with no responses

Saudi Production Management

A friend recently pointed me to a 2003 paper that attempts to explain the reasoning behind Saudi Arabia’s behavior with respect to their oil fields. This sort of managed production has always been my counter-argument to those who believe Saudi has peaked and production there is coming down involuntarily. This doesn’t prove that they haven’t peaked, but there is certainly another viable explanation for them reducing production.

Here is what I was sent:

The fact that they [Saudi] have not raised production despite high oil prices is not surprising, see article in attachment that you may find interesting. Below I quote one of their conclusions:

If a negative demand shock affects the crude oil market, the difficulties faced by Saudi Arabia are both grave and significant. Therefore, Saudi Arabia has an incentive to cut production in order to sustain higher prices. By contrast, if a positive demand shock affects the market, the large gains do not encourage Saudi Arabia to expand production. With regard to the supply shocks, the simulations indicate that the effects on crude oil prices are small, because the Rest of the World partly offsets the Saudi supply shock in the short term, whereas the Saudi marginal revenues curve is slightly affected in the long term. Nevertheless, any supply shock has an adverse effect on Saudi welfare, which suggests that Saudi Arabia would avoid any intervention, which might disturb the equilibrium in the crude oil market.

The source is Crude oil price fluctuations and Saudi Arabia’s behaviour, a 2003 paper by Roberto A. De Santis.