Counter-intuitive: Why Opec wants lower oil prices
Summary
The answer goes beyond Opec leader Saudi Arabia’s need to punish over-producers of oil like Kazakhstan and Iraq. With Trump set to visit Riyadh, the decision may have geopolitical motives too.
Cartels have one—and only one—raison d’être: push prices higher. Opec, the most famous of all of them, is a textbook example. So why is Saudi Arabia, which leads this group of oil producers, driving prices down?
Ostensibly, the kingdom is trying to re-establish discipline among rogue producers: Kazakhstan, Iraq and the UAE are cheating on their output targets. To force them to relent, Riyadh has been voting at Opec+ meetings for higher production for the whole group, hoping that the ensuing price decline forces the cartel’s troublemakers to fall in line.
The explanation makes a lot of sense. First, because the cheating is real, it’s getting worse and the unruly countries have ignored warnings. Second, because Saudi Arabia has done it before, launching price wars against Opec cheaters in 1985-86, 1998 and 2020.
Yet, I remain unconvinced that’s all there’s to it.
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To appreciate Saudi oil policy, it always helps to focus on what the kingdom does, rather than on what it says—whether in public or private. The doing is quite transparent: higher production, which results in lower oil prices. Importantly, Riyadh has made no effort to talk up the market.
In fact, the opposite is true.
In recent days, the Saudis have quietly sent a message to others in Opec and beyond: We can live with low oil prices. Reading between the lines, Riyadh seems to be aiming to keep Brent crude below $70 a barrel, and perhaps even lower, a significant departure from its previous so-called Saudi First policy of sustaining prices as close to $100 as possible.
Understanding the new approach is critical, given the last meeting of eight Opec+ countries, which happened on 5 May. The desire to punish cheaters is one explanation for the shift. But Kazakhstan sounds more like the collateral benefit of a new policy rather than its main reason. Saudi oil policy may have several objectives at once. So here are some educated guesses about Riyadh’s key considerations:
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First, Arabia has realized its previous policy of “as close to $100-a-barrel as possible" was unsustainable, as it would require further production cuts. To sustain high prices, Saudi output last year was its lowest since 2011. If Riyadh had maintained its policy of high prices, it probably wouldn’t be able to increase production in either 2025 or 2026. The outlook beyond that —in 2027 or 2028—looked increasingly difficult for an expansion, potentially condemning Riyadh to lower-forever output.
Second, Energy Minister Prince Abdulaziz bin Salman has long acknowledged, at least in private, that Riyadh had benefited from US sanctions on two Opec+ rivals: Iran and Venezuela. If either was producing anything close to their pre-sanctions level, Saudi Arabia would have long confronted lower prices or lower production—or both. Abdulaziz has also operated under the assumption that the sanctions would not last forever. If Riyadh feels that day is approaching—say because the White House negotiates a deal with Tehran—it may help to increase production.
Third, Arabia has also historically battled external producers—the biggest being the US. In 2014-16, it flooded the market to crush US shale producers. Famously, former Saudi oil minister Ali al-Naimi told American drillers in February 2016 they could “lower costs, borrow cash or liquidate" in the face of sub-$50-a-barrel prices. But declaring another price war against shale oil players would be politically difficult for Riyadh. Donald Trump appears to want lower oil prices, even if it may hurt its domestic energy industry. But American lawmakers like Senator Ted Cruz of Texas and Lisa Murkowski of Alaska, for example may not agree.
Fourth, for nearly a decade, Saudi Arabia has worked closely with Russia. But that relationship feels more transactional than strategic. Russian President Vladimir Putin is courting Trump, and Moscow could one day turn its back on Riyadh. Perhaps the Saudis sense a change in the Kremlin’s tone and are hedging their bets, increasing production before an actual split emerges.
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Finally, Riyadh is in talks with the US about several issues: defence guarantees, weapons contracts, Iran and a Saudi civilian nuclear programme. Oil surely plays a role in those talks. Trump is headed for Riyadh this month, making the country part of his second foreign trip (the first one was the unscheduled trip to Rome for the Pope’s funeral).
Ultimately, many of those considerations will inform the Saudi rationale to let oil prices drop by exercising its clout within Opec+. One of them will be the main driver, while the other gains would be collateral benefits. Keeping Kazakhstan and others in line is more likely among the latter than the former. ©Bloomberg
The author is a Bloomberg Opinion columnist covering energy and commodities.
