Saudi’s Oil Gamble: Bleed Now, Dominate Later

Saudi Increasing Production?

• Saudi Arabia has decided with OPEC to hike oil production to 137,000 barrels a day starting in October. Saudi Arabia, the dominant member, is pursuing higher production despite prices already being lower by 12% at the same time last year. This strategy conflicts with their long-term strategies of diversification which is heavily reliant on oil revenues. Thus, in this Cordoba note we unpick the macro and geopolitical factors behind what seems like irrational Saudi policy making.

Why The Saudi Offensive?

• Saudi has two main tools of influence with respect to geopolitics, the first is oil and the second being their strategic relationship with Israel. A relationship with Israel is politically radioactive due to the ongoing conflict in Gaza making it ultimately unviable for the foreseeable future due to the domestic backlash Mohamed Bin Salman (MBS) would receive which leaves them with oil as their only real alternative. Oil is a weapon that provides them with political clout to attain their desires. The was best evidenced when MBS punished President Joe Biden weeks before the mid – term elections for calling Saudi a pariah state to which President Joe Biden sent American envoys to negotiate.

• Over the past decade the world has seen huge shifts away from a Saudi dominated oil market as their position has been encroached on by countries including the U.S., Brazil, Russia and India. As Saudi’s market share diminishes so does their ability to influence markets. Thus, after Trump pushed oil producing and oil reselling allies such as Brazil and India towards China strengthens Saudi’s new competition, BRICS.

• These countries previously had tensions among each other. However, now that the American led order is seeing its demise, the opportunity for them to realign their interests has never been larger. If the core BRICS nations have less tension among each other then this could lead to less trade barriers, more globalisation and more economic growth. Thus, Brazil, India and Russia, all of whom have a share within the oil market stand to gain significantly through purchases among each other, but more importantly through China who most likely will start buying more oil from these nations to further deepen ties. This is a strategic move from Beijing as it supports their goal to increase dependency, diversify their suppliers and optimise supply chain costs. Brazilian crude is particularly essential as it is easier to refine which leads to better yields for gasoline, diesel, and jet fuel. Although Saudi is currently one of the biggest exporters of oil to China this may not be the case in the future. Therefore, BRICS nations could transform the oil landscape which Riyadh cannot afford especially as funds dwindle for its Vision 2030.

Cordoba’s View

• The world is in a volatile state whereby the global order is shifting towards China and developing nations. Because many countries growth were previously curtailed by US dominance, a world with their absence will see unfettered growth. Developing nations need oil to grow their economies which means the demand for oil will get larger. Because many developing nations are a part of BRICS, Saudi is left with little choice but to play a dangerous strategy of short-term fiscal pain, but a long-term attempt to squeeze out competitors in one final chance to reassert and maintain their dominance over a geopolitically changing world.