Saudi Arabia - joining the dots: Part 6 - Emergency meeting

Saudi Arabia - joining the dots is a series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy.

Part 6 - Emergency meeting

OPEC's traditional strategy has been to cut production to maintain prices, but recent behaviour of the cartel or at least that of its largest member (and swing producer) shows a marked deviation from the strategy.

Saudi Arabia has been a key driver of the protect market share strategy, convincing other OPEC members that a period of low prices would cut US supply and therefore restore the supply-demand dynamics of the market. However, Al-Naimi's stance of keeping to this strategy "even if prices hit USD20 a barrel" (December 2014) has scared the other OPEC members, who do not have the deep pockets to keep their countries afloat.

Nine months into the oil price decline, many of the members are feeling the pressure with fiscal reserves running low. Saudi Arabia and its Gulf neighbours are the exception with their vast monetary reserves, but with large social spending programmes, these countries are now running deficits and chipping away at those reserves.

Discussions between the various OPEC members on the next course of action are ongoing with the next meeting scheduled for June 2015. However, in February 2015, Ms Alison-Madueke, president of OPEC said in an interview with the FT that if the oil price "slips any further, it is highly likely that I will have to call an extraordinary meeting of OPEC in the next six weeks or so". Extraordinary meetings have to be agreed upon by all 12 members.

Ms Alison-Madueke also admitted that "When you cede market share continuously, you drive yourself into oblivion...many OPEC members are going to suffer greatly from a a drastic fall in the price". There-in lies the dilemma - the OPEC members' problem lies in the deeply rooted dependence on oil revenues and large social programmes; cutting production risks further loss of oil revenue, while maintaining production keeps the oil price low...and no-one wants to be first mover. Huge structural reforms are needed but these will not be easy, especially in the aftermath of the Arab Spring and will likely take many decades to achieve.