SOAS Research Online

Abstract

Given its highly undiversified economic base, maximizing revenues will always rank highly in Saudi Arabia’s output decision. However, this objective needs to be balanced against another—maintaining its share in key markets and maximizing long-term revenue—given the massive size of Saudi Arabia’s reserves. The trade-off between these two objectives tends to change over time, depending on market conditions, the nature of the shock, and the behaviour of other producers; Saudi Arabia’s oil policy is hence not constant. We argue that the advent of US shale has made the calculus of the trade-off more uncertain, complicating Saudi Arabia’s output decision. Using a simple game, we show that, under uncertainty, it is always safer for the Kingdom to assume that the shale oil supply is highly elastic, and thus decide not to cut output. But as Saudi Arabia learns more about this new source of supply, its policy could adapt accordingly. The fact that Saudi Arabia’s oil policy could change as the trade-off between revenue maximization and market share evolves, and as new information to the market arrives, will keep the market second guessing and will continue to shape market expectations and to influence market outcomes JEL Q48 - Government Policy D43 - Oligopoly and Other Forms of Market Imperfection Q41 - Demand and Supply; Prices D81 - Criteria for Decision-Making under Risk and Uncertainty Q02 - Commodity Markets