Saudi Arabia and OPEC oil output

A careful comparison of Saudi Arabia’s oil production behavior with rest-of-OPEC production provides a way to see the consistency in Saudi behavior where many analysts have missed it, according to the authors of a report forthcoming in the journal Energy Policy. Sometimes Saudi and rest-of-OPEC production movements are positively correlated and other times negatively correlated–a relation that hides the consistency in Saudi policy according to the authors. But if stability of the world oil market post-1973 is identified as the Saudi goal, it can be seen that Saudi acts jointly with rest-of-OPEC to reduce output at times of declining world demand but works to counteract rest-of-OPEC declines by boosting output during supply interruptions elsewhere.

Here is a bit more from the introduction to the article:

OPEC quadrupled crude oil prices nearly 40 years ago, and since then we have witnessed a large literature about how OPEC and its key producers have acted within the world oil market. A substantial part of this literature stems from the analysis by Griffin (1985).1 Yet there has been surprisingly little agreement about some of the most important questions, such as the role of Saudi Arabia and whether it coordinates its production decisions with its partners in OPEC. Smith (2005, p. 75) does not find clearly discernible consistency in the actions of Saudi Arabia, while Kaufmann et al. (2008, p. 348) find no clear relationship between Saudi production and that from the Rest of OPEC.

This article re-examines these questions, with a special focus on Saudi Arabia’s decisions about its levels of oil production and exports.2 Although others have used a single model for Saudi Arabia over time, we believe that Saudi behavior has varied, depending upon the circumstances.3 In many years Saudi Arabia has acted together with the Rest of OPEC, restricting its exports together with its OPEC partners as demand declined, and expanding its exports when demand increased. The most notable examples of proportional restriction in exports during recessions are 1974–1975, 1998, 2002, and in 2008–2009. At other times, however, the Saudis have acted independently from the Rest of OPEC, most notably at those times of supply interruption elsewhere in OPEC: 1978 in Iran, 1980–1981 in Iraq and Iran, 1990 in Kuwait and Iraq, 2003 in Iraq, 2011 in Libya. On these occasions, rather than matching the export cutbacks elsewhere in OPEC, the Saudis increased their exports to offset the interruptions.4

This variation in Saudi export behavior over time is evident in the correlation between the changes in Saudi oil exports and changes in exports from the Rest of OPEC. In most “normal” periods (excluding interruptions and recoveries), the correlation is relatively high, at about 0.7. But during interruptions the correlation becomes negative. Although the average correlation since 1973 is 0.19, this masks the wide variation over time: strongly positive during “normal” periods but negative during and after supply interruptions.

We analyze these different periods separately, distinguishing between normal periods and interruptions, and between increases and decreases in Saudi exports. Within this complexity, we find consistent behavior by Saudi Arabia.

Links are in the original source an go to the article bibliography or footnotes. It may be gated for some readers (but try finding Energy Policy through your local public library if it provides access to electronic publications, or use this link to an earlier version of the article).

The authors of the article are Khalid Alkhathlan, Dermot Gately, and Muhammad Javid.

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