As Oil Prices Plummet, Saudi Arabia Faces a Test of Strategy

As Oil Prices Plummet, Saudi Arabia Faces a Test of Strategy

With global oil prices plunging at a pace not seen since the 2008 financial crisis, Saudi Arabia is emerging as a central player, accused by some of deliberately depressing the market to weaken rivals like Iran but looked to by others as the only hope of ending the rout. Still others say that the oil colossus is merely struggling to deal with its diminished position in an industry it once dominated.

For their part, Saudi officials have signaled that they are prepared to endure reduced profits rather than slash production in an effort to prop up prices, as they did to their later regret in the early 1980s.
Yet the Saudi acceptance of lower prices has even touched off a controversy inside the kingdom. This week, the billionaire investor Prince Alwaleed bin Talal released an open letter to the Saudi oil minister, Ali al-Naimi, criticizing him for saying that lower oil prices were no cause for alarm.

In the letter, Prince Alwaleed called the price drop a “catastrophe that cannot go unmentioned” and suggested it could harm the kingdom’s budget.

Some analysts say Saudi Arabia runs few risks in letting oil prices remain low because the government has large financial reserves and low debt that could help it ride out budget deficits. But there are dissenters, like Badr H. Jafar, a senior oil executive from the United Arab Emirates, who thinks Saudi Arabia will need higher oil prices eventually to support high levels of social spending.

He says the immediate strategy of the Saudis is to discourage high-cost producers in the United States and Canada and to “serve as an inherent warning to other producers in advance of an OPEC meeting next month that they will all need to make production cuts together if they are to curb this bearish trend.”

Others say the kingdom is facing lower prices no matter what it does because it cannot control the causes of the price dive, which include the drilling frenzy in North America and falling demand in Europe, Japan and much of the developing world. So it makes sense for the Saudis to defend their share of the global market, oil experts say.

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