Saudi Arabia: swing producer any longer?

[Rakesh Bhandari <rakeshb@xxxxxxxxxxxx>]

Title: Saudi Arabia: swing producer any longer?

In a recent Economist, the editors argue that Saudi Arabia remains a swing producer, i.e., has the power through its output decisions to control the global price of oil.

 I quote here from a chapter "Oil: temporarily a special case" in Kunibert Raffer and Hans Singer's The Economic North South Divide: Six Decades of Unequal Development.(Elgar, 2001) They seem to have reached the same conclusion  as Cyrus Bina had 15 years ago regarding the dwindling pricing power of OPEC or Saudi Arabia in particular.

Rakesh
"When OPEC could not stop the gradual erosion of its market share it abandoned its policy of restricting supply, which led to the price collapse of 1986. This policy was mainly based on Saudi Arabia's willingness to be a 'swing producer', the country reducing its production substantially. Between 1980 and 1985, Saudi production declined by more than two thirds. It fell so low that associated gas production could no longer meet the kingdom's internal needs. Maintaining their idle capacities in a state of readiness caused considerable costs. In August 1985, Saudi Arabia linked prices to the spot market, and raised output to 5 million barrels per day in early 1986. The emerging new pricing system linked transaction prices closely to prices, established in organized trading markets. This change highlighted OPEC's new situation. In the 1970s,  Saudi Arabia Light served as the so-called 'market crude,' the basis on which all oil prices were calculated. At the beginning of the 1980s, spot prices started to dominate official OPEC prices. Nowadays non OPEC crudes, such as Brent UK or West Texas intermediate (as traded at the New York Mercantile Exchange), are usually quoted as THE oil price.

"UNCTAD (1999) describes the present situation: 'a new pricing system dominated by future markets has emerged. Under this system, traders set up key futures prices based mainly on expectations of market conditions. Transaction prices have become closely linked to prices established in the organized trading markets. The large influence and the functioning of futures trading have resulted in more transparency in the petroleum market, enabling not only consumers but also speculators to react to shifts in supply or demand more rapidly.'

"The former direct link between changes in supply and price does not exist any longer."

Then on the conditions in the oil market in 2000:

"In spite of further increases of production, prices have not fallen. As prices are now determined on exchanges speculators may well be able to raise prices further while output expands, thus reducing the pricing power of producers, as OPEC (2000) pointed out. After the summer OPEC became more outspoken. After three agreements by OPEC members to raise output in 2000 and a total increase of  'no less than 3.3 mb/d, brining supply to the market will in excess of anticipated oil demands', crude prices had [not?] fallen noticeably over recent days. According to OPEC, the real reasons for market volatility were therefore refining bottlenecks, 'speculation in the futures market, manipulation of the Brent market due to dwindling volumes of this crude,' and widening differentials between certain types of crudes. These are all elements 'about which OPEC can do little or nothing at all'. Naturally the approaching winter is one reason fuelling speculation. Should it be very cold, this would strongly affect demand for heating oil."