Why Saudi Arabia Wanted To Keep Oil Prices Down And Why It Gave In

The past two years have seen major fluctuations in the price of oil. Crude oil prices change mainly according to supply, demand, and futures trading, and each of those factors is subject to different market forces. While it would seem that oil producing nations would want to see prices rise indefinitely, lower prices can at times be a benefit. A recent controversy within OPEC illustrates this fact.

In the fall of 2016, Saudi Arabia insisted on keeping production high and prices low. However, other OPEC member nations, like Venezuela and Nigeria, wanted the price to go up in order to deal with a multitude of financial problems, including food shortages, rising inflation, and unemployment. When oil prices are high, not only do oil companies or the states that own them earn more profit, they have more money available to reinvest in things like exploration, research, and technological development. These activities can improve an oil company’s ability to extract, refine, and distribute their product. With all of these benefits, why keep prices down?

According to some industry experts, Saudi Arabia’s plan to keep prices down was part of a long-range plan to dominate the U.S. oil industry, which is dependent on fracking. Because it’s more expensive to frack than drill, ongoing low prices could damage the U.S. fracking industry. In fact, many smaller companies went out of business when prices bottomed out. Another piece of the plan, say some analysts, was to make the U.S. economy dependent on low oil prices and then drive them up suddenly to provoke a financial crisis. A different theory suggests that the U.S. and Saudi Arabia were both using low oil prices to undermine the Russian economy.

In the end, Saudi Arabia gave in to the other OPEC members’ wish to drive prices back up through lowered production. Their own economy was suffering without the oil revenues to reinvest, and the low oil prices were hurting their plans to reduce their own dependence on oil. Consequently, experts predict that oil prices are headed back up in 2017, though not quickly or dramatically. Investors who want to know what to expect from the energy industry as a whole in 2017 can find out here.