How Saudi Arabia is manipulating Oil Prices
(and why)
Saudi Arabia is one of the world’s largest oil producers and the largest exporter of oil on the planet. Saudi Arabia can be the world’s largest exporter not only because of the massive oil fields under Saudi control but also because they have an exponentially smaller population than the other large producers. For example, while the USA is the largest producer of oil in the world, with a population of over 330 million people the vast majority of American oil is produced in-country and cannot be exported. Comparatively, Saudia Arabia only has around 36 million residents and such can send much more oil out.
How does Saudi Arabia manipulate oil prices?
Saudi Arabia can influence oil prices on a global scale through the use of Spare Capacity Wells. Spare Capacity Wells are oil wells that are not currently turned on but could be activated in a short amount of time. Think of it like having two fireplaces in your house but only one is actively burning wood. It’s not that the other can’t be used, it’s just that it isn’t.
By turning more oil wells off and adding to their Spare Capacity, Saudi Arabia can cut the amount of oil being released into the global economy and drive the price of oil up. Consequently, the price of practically everything is also driven up, because oil is involved in almost every industry on the planet. Vice versa, by turning more Spare Capacity Wells on more oil is able to be exported, lowering prices.
Unlike the USA, where the oil companies are all publicly or privately owned, the Saudi oil company (Saudi Aramco), is state-owned. Because of this, the Saudi government can use Spare Capacity Wells as a political bargaining chip much more easily than the United States can. This advantage is also seen in Russia Gazprom, the second-largest exporter of oil (Before the Ukrainian invasion-related sanctions).
While the method of how Saudi Arabia can manipulate oil prices globally, to fully understand why they do this you have to go back in history to the founding of Saudi Arabia and its royal family, the House of Saud.
History of Saudi Arabia
The House of Saud originated over 300 years ago in current Saudi Arabia, and the most important information from the earliest history is their ancestral claim to Saudi Arabia and an alliance with the Wahhab family.
The House of Saud was founded in the center of modern-day Saudi Arabia. This is important because it means the House of Saud does have an ancestral claim to Saudi Arabia. However, their claim is significantly smaller than the current day Saudi Arabia.
In the above image, the darkest green is the land they have an ancestral claim on, and the surrounding dark red line is current-day Saudi Arabia’s border.
During this early history, the House of Saud was banished from their ancestral home in Diriyah to Kuwait. To take back their land, the House of Saud allied with Sunni Wahhabs to gain their military force. With this new alliance, the House of Saud successfully regained their ancestral homeland.
Over time, the House of Saud expanded their land until their eventual defeat at the hands of the Ottoman Empire. Although this First Saudi State fell, the House of Saud survived to eventually reclaim power. Another important thing about the First Saudi State was the creation of the Saud-Wahhab alliance. This alliance exists to this day where the Sauds serve as the political leaders and the Wahhabs as religious leaders.
In 1902, Abdulaziz Ibn Saud recaptured Riyadh and began a series of campaigns to unify the Arabian Peninsula under his leadership. He successfully brought together various tribes, and in 1932, he officially declared the Kingdom of Saudi Arabia, with himself as its first king. During the beginning of his rule, Saudi Arabia was a poor country, with their only major income coming from religious travelers going to the holy cities of Mecca and Medina.
However, this would soon change drastically. Upon British discoveries of oil in Iraq, Iran, and Bahrain, Ibn Saud would convince himself that his kingdom also possessed oil. Since Ibn Saud was wary of Britain's imperialist tendencies, he chose to go with a different country to scout for oil, the emerging power of the USA. Ibn Saud would grant exclusive rights to search for oil to Socal (later known as Chevron.) Five years later, Socal would discover oil at Dammam #7. Chevron would go on to create a subsidiary for their Saudi venture, Aramco. Saudi Arabia eventually acquire Aramco, renaming it Saudi Aramco.
Following 1938, more and more oil fields were found in Saudi Arabia’s eastern province.
The American government was well aware that in the WW2 aftermath, they were going to need as much oil as possible to compete with the Soviet bloc, especially since Russia possesses many oil fields in their own homeland. To accomplish this FDR met with Ibn Saud, and the two leaders came to an arrangement between the two countries. The US would get Saudi oil, while the Saudis got protection from America. The Saudis needed American protection because they were surrounded by enemies both inside and outside of their country, and could never properly defend themselves.
More oil fields were discovered, including the Ghawar oil field, the largest oil field in the world and the greatest source of energy for our species, ever. As a result, the rain of oil money turned into a downpour, and then a waterfall.
Because the Wahhab Clan alliance was still active, Saudi Arabia was governed by a group of extreme Sunni Muslim fundamentalists. This contrasted starkly with many residents of Saudi Arabia, which included less strict Sunnis and Shias. The Wahab ideology caused widespread unrest within Saudi Arabia. Using this oil money, the Saud family reached a compromise with its citizens to quell the unrest.
Yes. The House of Saud decided to just throw money at the problem until it went away. Because oil was paying for everything, Saudi Arabia had no need to charge its citizens any taxes. In addition to this, almost all of their citizen’s needs were subsidized by the government, including gas, electricity, food, water, education, and healthcare, along with other benefits. For all of this, citizens were expected to submit to the strict Wahhabist beliefs and recognize the House of Saud’s legitimacy as rulers of Saudi Arabia.
Over time, the US became increasingly reliant on Saudi Arabian oil until 1991, when 33% of all US oil imports came directly from Saudi Arabian oil fields.
However, this increase in demand led to a conundrum for the Saudis. With more Westerners entering the country and exports increasing as a result of oil, the more strict Muslims/Wahhabs felt that the House of Saud was betraying them. Certain other factors increased this issue. For example, when Iran invaded Saudi Arabia, the Saudi king chose to allow US troops to defend his country rather than Osama Bin Laden’s mujahadeen fighters (Keep in mind that it would have been considered a far better option for Bin Laden’s followers who were Muslims themselves by the stricter Muslims). Osama Bin Laden’s origin in Saudi Arabia and his eventual attacks on September 11th would serve as a sore spot in relations between Saudi Arabia and the US.
To avert the sentiment of the House of Saud betraying the extremist Muslims, the House of Saud increased its religious police activity and undone recent civil rights reforms, as well as making homosexuality a crime punished by the death sentence. By doing this, the Western sentiment toward Saudi Arabia was worsened as the Wahhabist beliefs and Western ideals frequently conflicted.
Fast Forward…
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Fracking and renewable energy
Despite these cracks forming in the US-Saudi relationship, as long as the US was still dependent on Saudi oil certain issues (human rights abuses, lack of political freedoms, gender inequality, repression of dissent, restrictions on religious freedom, treatment of migrant workers, censorship and media control, lack of LGBTQ+ rights, limited legal rights for women, international criticism of its human rights record, lack of transparency in governance, allegations of supporting extremist groups, limited accountability for government officials) with Saudi Arabia were overlooked out of necessity.
This dynamic began to quickly change upon the discovery of a revolutionary new technology: fracking. With fracking, oil could be extracted out of the hydrocarbons in shale rock. Fortunately, the US had a number of shale deposits:
Fracking allowed the US to break its dependency on foreign oil, making them the largest producer of oil on the planet, as well as a “net positive” in oil production. This means the country produces more than it uses and can export it to other countries.
The United States decreased necessity for Saudi Arabia became evident quickly after its refusal to back Saudi Arabia in an invasion of Revolutionary Iran following the Abqaiq–Khurais attack on Saudi oil installations. This came as a stark contrast to decades before when the US would offer and send tens of thousands of soldiers to Saudi Arabia during the previous Iranian invasion of Saudi Arabia. These changes to the US temperament came incredibly concerning to the House of Saud because Saudi Arabia is surrounded by countries that actively want to take their land and overthrow the royal family. The United States is the greatest deterrent Saudi Arabia has, so the removal of this deterrent could easily spell the end for the House of Saud.
The first reason for Saudi Arabia’s oil manipulation: Safety
Whilst the United States is now largely independent from Saudi Arabia’s oil, the same cannot be said for many of the United States’ closest allies. Because Saudi Arabia is growing concerned about the United States withdrawing from protecting them, they clearly want to secure ironclad security guarantees while they still have the opportunity. By driving up the price of oil now, they can use it as a chip to negotiate with the US for guarantees. They could offer to open up more oil pipelines now, which would not only help out US allies but also drive down costs domestically.
The second reason for Saudi Arabia’s oil manipulation: Money
Saudi Arabia is well aware of its complete dependency on the countries oil industry, with 46% of its GDP in oil and over 80% of the governments budget funded off of oil alone. As the world is moving away from fossil fuels like oil and towards renewable energy over the next few decades, Saudi Arabia’s prosperity will decline as the demand for oil falls. In an effort to combat this, Saudi crown prince Muhammed Bin Salman announced Saudi Vision 2030 in 2016. This program aims to increase diversification and reduce oil dependency in the Saudi Arabian industry through developing other industries like tourism.
Saudi Vision 2030 will be an incredibly expensive project for Saudi Arabia, as it requires completely new infrastructure after decades of being a country based on oil. This infrastructure will be very different than other countries because one of Saudi Vision 2030’s main focuses will be increasing tourism to the country. Tourism as an industry makes a lot of sense for Saudi Arabia because the country holds very few resources of value other than oil (Evidenced by Saudi Arabia’s poverty before the discovery of oil).
Although it is probably the best course of action for Saudi Arabia, creating places tourists will want to visit will also be very expensive. One example of this is the recently announced “Line” city, a city in the desert that will be built in a very narrow, long line.
This will cost an estimated 1 trillion dollars to build and likely will take even longer because of how quickly the crown prince wants it built. To source all of this money, Saudi Arabia is raising the price of oil by cutting back on their production along with other countries. This is one of the reasons for Saudi Arabia’s relationship with Russia. They don’t actually have significant shared interests other than oil being a large part of both economies, and both countries needing funds for differing reasons. By doing this, however, Saudi Arabia is risking their relationship with the United States, so it is a line they must tread carefully.
Saudi Arabia is going through a very risky but necessary cultural and financial change to survive as a country. These changes will have huge impacts both domestically and internationally, standing as one of the many examples of how the international market leaves everything connected.
I hope you enjoyed this article, I believe it has been my longest to date. It’s a bit different from my standard content because it’s less tied to specific companies, but I found the topic really interesting and it related to the biggest sector I am exposed it. Might write a follow-up article extrapolating on this with companies that could most stand to benefit from this. If you liked it, please consider subscribing, pledging a subscription, liking, or sharing. I would also really appreciate your feedback and ideas, so please leave a comment. I make an effort to respond to all comments, and look forward to reading them!
Great post!! Very insightful!