Saudis no longer control the oil market

The most popular conspiracy theory is that the United States and Saudi Arabia have combined to take money away from their major adversaries - Russia and Iran - and to bring them to the negotiating table in order to sort out a deal on Ukraine and Iran's nuclear ambitions, respectively. This notion has some plausibility, but the reality is more prosaic: excess supply continues to chase static demand. The result is falling prices. And this may well continue.

The interesting question is what happens next. That's up to the Saudis. The risk for the whole industry, and for many countries dependent on oil revenues, is that Saudi Arabia may have lost control of the market. Prices could go a good deal lower with wide and mostly negative consequences, starting with more regional instability and a cutback in investment, which can only feed the next cycle.

We tend to have a mental image of Saudi Arabia from the 1970s and 1980s: a fabulously wealthy country with a tiny population sitting on a sea of oil, staffed by brilliant technocrats who can set the world price by adjusting output and exports at will. This power supposedly gives Saudi Arabia not just enormous revenues but also US protection in a dangerous world.

If it ever reflected the truth, this image is now wrong in almost every respect. Saudi rulers face dissent across the Middle East. Saudi Arabia's population is now almost 30 million, up from 5.7 million in 1970. The technocrats have thus far failed to develop an industrial economy or to find gas to provide local power. Domestic oil demand keeps on rising. Thirty million Saudis now use as much oil (3 million barrels a day) as 203 million Brazilians.

The Saudis may no longer be in a position to reverse the price fall. The danger of the trend since June is that, with each step downward, other producers tend to increase short-term production to maximize much-needed revenue. Any field that can produce a bit more is pushed a little harder. Normal maintenance schedules are postponed, and so on.