Saudi Arabia’s decision last week to deliver a surprise cut of 1 million barrels a day in its crude production shocked the oil market.
In abandoning a policy of collective responsibility and letting other members of the OPEC+ grouping increase output while reducing its own, the kingdom took the entire burden of balancing supply and demand on its shoulders. While choking off its own oil wells, Saudi Arabia is offering frenemies like Russia (and enemies like Iran) a chance to boost their market share on its own dime.
That decision makes little sense if you think about Saudi Arabia’s policy in terms of a conventional trade-off between maximizing oil revenue or market share — but that framing should be treated with caution, anyway. For the foreseeable future, Riyadh is always going to be happy to sacrifice market share as long as it can prop up revenue. With crude demand heading rapidly toward terminal decline, it may even be able to cut output without losing its position.
The conventional dilemma goes like this: If Saudi Arabia pumps more crude it will increase market share. The increased supply, though, may weigh so heavily on prices that revenue ends up falling instead. On the other hand, reducing production and market share may paradoxically increase revenue, as inflexible demand pushes up the per-barrel price.
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