Authored by Robert Rapier
It’s no secret that the growth of U.S. shale oil has been a thorn in the sides of both Saudi Arabia and Russia. They have seen their market shares erode as the shale boom made the U.S. the world’s largest producer of crude oil. But Saudi Arabia’s national oil company, Saudi Aramco, is a single entity that produces 13 percent of the world’s oil and controls 17 percent of the world’s proved reserves. That puts them in a very powerful position. They can withhold a lot of oil from the market, or they can flood the market with oil and crash the price.
I have warned many times that Saudi Aramco’s power shouldn’t be underestimated, even as some were suggesting the shale oil had rendered OPEC (which they control) toothless. In an article I wrote in 2016, I observed:
“OPEC is a big reason oil prices fell into $20s earlier this year, and they were a big reason oil prices were at $100 a few years ago. What other organization has the power to move the price of oil so dramatically — both up and down? That is real market power. So they may sometimes behave like a paper tiger. But they are capable of rapidly moving the global oil markets.”
Saudi Arabia should not be underestimated. They started a price war in 2014 that drove oil prices into the $20s. No other single entity could have done that. The strategy temporarily stalled U.S. oil production, and although they did bankrupt a few shale oil producers, the industry proved resilient. So Saudi Arabia switched back to cutting production to prop up prices in 2016, and until recently they had maintained that strategy.