It will take much cheaper oil for Saudi Arabia to take action

THERE comes a time when any self-respecting cartel boss has to focus on protecting his turf. Saudi Arabia has spent the past nine months fighting to safeguard its share of the global oil market, increasing its own crude production to record highs. That exasperates its weaker OPEC partners. It also seems utterly self-defeating, especially after world oil prices plunged below $45 a barrel on August 24th, a six-and-a half year low. Some say its folly is attempting to fight an unwinnable war against American “frackers”. But its eye may be more on local Shia-led rivals, Iraq and Iran.

On August 23rd OPEC-member Iran echoed the frustrations previously aired by Algeria and said it would welcome—or “not disagree with”—an emergency meeting of the producers' cartel to shore up prices. Yet two days later Bijan Zanganeh, its oil minister, outlined plans, once nuclear-related sanctions are lifted, to eventually add 1m barrels a day (b/d) to production, reclaiming lost market share. (He also said investment had shrunk to almost nothing, so it was not clear how Iran would achieve this.) Iraq, too, is pumping hard to make up for production lost during years of sectarian conflict. The Paris-based International Energy Agency says Iraqi crude output has jumped by 740,000 b/d in the course of this year, a much larger proportional increase than Saudi Arabia’s

The kingdom can respond in several ways. It can turn a deaf ear to calls for a co-ordinated cutback, as it has since imposing an OPEC agreement in November to let market forces set prices. It could blame a weakening Chinese economy for the failure of that policy, and suggest it is ready for a rethink. Or it could strike a bold agreement with Iraq and Iran for output quotas.

The latter, analysts say, is the most difficult because Iraq and Iran believe the Saudis have stolen market share from them during their recent troubles, and are relatively low-cost producers so able to withstand a price war. Tensions over regional supremacy between the Sunni Saudis and Shia Iran also cloud the picture, though analysts say when it comes to OPEC policy, money matters more than geopolitics.

Waiting and watching
China’s recent woes have given the Saudis a fig leaf to hide behind if they want to change course. Paul Stevens of Chatham House, a London-based think-tank, says they could pretend the low oil price is in response to slumping global demand, not over-supply. However, the kingdom is likely to be adamant that it will not bear the burden alone; between 1980 and 1985-6, its production slumped from 10m b/d to below 2.5m b/d, yet prices continued to tumble. That lesson has never been forgotten.

Bassam Fattouh of the Oxford Institute for Energy Studies notes that co-ordinating an output cut even within OPEC is not easy: when prices are falling, the most cash-strapped countries have a big incentive to cheat, until prices become so low that the extra pain of halting production is worth the gain. Though Saudi Arabia’s public spending has tripled in the past decade, needing $100 oil to balance the budget, it has foreign assets to sell and a debt ratio of just 1.6% of GDP. That gives it the leeway to avoid making a rushed decision.

It is likely to be pragmatic. The drop this year has rendered high-cost production, such as Brazilian deep-water fields and Canadian tar sands, less profitable, much as it had hoped; overall non-OPEC output growth is slowing. It may believe that the next leg down in the oil price will hurt America’s shale industry, though it clearly underestimated the cost-cutting potential in hydraulic fracturing (fracking). Mr Stevens says that for the first time since the late 1920s the oil market is being left to find its own floor—though no one knows where it is. As Al Capone, a cartel boss of that era, would have put it: “My rackets are run on strictly American lines and they’re going to stay that way.”