The US has the final say on the price of oil

Oct. 12, 2018

Please do not lose sight of the fact that, ultimately the United States, through its ally Saudi Arabia, has the final say on the price of oil. If the U.S. were to encourage Saudi Arabia to begin selling oil at steep discounts, the world price of oil would fall, lowering the price of Russian exports, potentially to a level that would bankrupt Russia. The pricing mechanism for oil dictates this possible scenario, since the swing producer ultimately sets the price of oil, and Saudi Arabia remains the swing producer.

By the application of unused and possibly unrecognized oil pricing power, the U.S. can exert considerable influence on world affairs.

Response from Xander Snyder

Hi Bill,

Turns out we looked into this, and while the U.S. is certainly encouraging Saudi Arabia to increase production, there’s only so much additional production capacity it has. The best estimates I found (which you can read in this piece) are roughly 12.5 million barrels per day, and Saudi Arabia currently produces around 10.7 million bpd. So it can increase production, but only so much.

Your hypothetical seems unrealistic – why would Saudi Arabia willingly abide by a U.S. request to make less money from a potentially fortuitous but short-lived circumstance where oil prices are high? Saudi Arabia is strapped for cash, especially with all the investment it needs for its reform initiatives. It would need something more than a pleasant request from the U.S. to make up this difference. What’s certain is that Saudi Arabia’s spare capacity is not sufficient to raise oil supply to a level that could bankrupt Russia, especially if Iran’s exports fall off the market and Iran can find other places (like Iraq) where it can put pressure on global supply.



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