How Saudi Arabia Steers Global Oil Markets

1. The Saudi state budget is largely financed by the oil sector. Saudi Arabia needs much higher oil prices on world oil markets to restructure the state budget.

In recent years, we have seen that Saudi Arabia has had to reduce its oil production. One of the main reasons was that Saudi Arabia wanted to reduce the amount of oil available on the market. So Saudi Arabia may have thought they could control the price of oil. The main goal was to keep the price of crude oil high in order to finance the state budget through increased export sales. This is because Saudi Arabia needs a much higher price than the current $50 per barrel oil, at least in the long term, to balance its national budget. At the same time, Saudi Arabia must prepare for the coming changes in the global economy. Entering the renewable energy transition could be a good move, even if there is a lot of competition out there. 

But the United States is currently competing with Saudi Arabia in the energy sector. Due to the large amounts of shale oil and shale gas in the United States, the Western nation has once again become an oil and gas exporter. The United States is now exporting some of its oil and gas production to Western countries, especially the European Union. Oil and gas processing will only be profitable if the rest of the oil production that the United States does not need itself is exported, especially the quantities destined for the export of liquefied natural gas. Much of this processing and refining of crude oil and natural gas takes place in Texas, where some of the largest and most modern refineries in the United States are located.

2. Long-term outlook for Saudi Arabia’s oil and gas supplies

Oil and gas production volumes in the USA are expected to decline, as the USA has already passed its peak in conventional oil production. But Saudi Arabia will not be able to rule out a fate similar to that of the USA either. There are indications that Saudi Arabia has already passed the peak of oil production, which would also mean that we have passed the peak of world oil production. Among other things, the indications are that Saudi Arabia wants to initiate the privatization of Saudi Aramco through an IPO. This would be one of the largest IPOs ever undertaken by a public company. Eventually, the government of Saudi Arabia changed its mind and withdrew the public offering until further notice. However, it is questionable how long Saudi Arabia can keep a lid on technical indicators of the actual size of the country’s oil reserves. As a rule, almost all OPEC countries keep their oil reserve figures secret.

For decades, some countries had proclaimed that their oil reserves had remained constant over the years, which in reality was not the case. It is precisely this breakdown in trust between the various OPEC countries that is now becoming a pain point for Saudi Arabia. There is little trust between the countries, and neither of them knows how high the other country’s oil production is. As a result, the market value of the oil may be completely misjudged. Since natural gas contracts are usually tied to market prices for crude oil, natural gas is also misvalued.

Saudi Arabia remains in a delicate geopolitical situation. Iran, in particular, is an energy competitor for Saudi Arabia. The United States’ approach to Iran is particularly sensitive. Because oil contracts are priced in U.S. dollars in international oil markets, Saudi Arabia has less leeway in foreign exchange arrangements. which may mean it has less leverage. This partly explains why Saudi Arabia eventually urged the United States not to lift sanctions on Iran.

3. Conclusion of Saudi Arabia’s current energy policy

The current geopolitical situation in Saudi Arabia is difficult to analyze because it depends on many different factors.

With regard to the energy sector, Saudi Arabia is expected to experience a significant decline in oil export revenues in the future. This can lead to domestic problems, because it is the export revenues from the oil industry that ensure the cohesion of Saudi society.

Attempts to build new cities in the desert in competition with Dubai seem feasible only under certain conditions. We expect the U.S. to continue to work closely with Saudi Arabia on military and energy issues, which makes sense in principle. Finally, only a small part of Europe’s oil and gas production comes from the Gulf states.

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This article is just meant to inform the reader of recent developments in the energy industry at large and to share knowledge and insights with a wider audience. The author does not put forth investment recommendations. This article should not be taken as investment advice and the author cannot be held to account for investments made. For more information, please refer to the Legal Disclosure and Privacy Policy, which you can click on or find at the top of this page in the menu bar. 

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