Saudi Oil Production Cut: Political or Economic?

Hossein Askari
9 min readOct 20, 2022

And the Fallout?

At the outset, let me be clear. Historically, Saudi oil output/pricing decisions have been political as well as economic — most dramatically in 1973 with the Arab oil embargo and throughout the years to the present. The king has traditionally steered all major decisions, largely based on political considerations, something that I experienced first-hand when King Fahd overruled a commitment of his foreign minister, Saud Al-Faisal, to me to cooperate with Iran on oil policy within OPEC. Why such political considerations? For example, Saudi Arabia has felt existential threats from Iran ever since its 1979 revolution and the growing number of radicals and revolutionaries in the Middle East. So the Al-Saud kings essentially sub-contracted their security to the United States. They relied on the United States for advisors and personnel, training, military equipment from tanks to planes, to command and control, for equipment maintenance, support from mid-air refueling to flying AWACS around the Persian Gulf and military and political intelligence. You name it, it was the United States. It is an understatement to say that Saudi Arabia relied on the United States, as reliance on the U.S. was almost total from 1945 until the early years of this century.

Of course economics was always a part and parcel of every decision to do with oil. When you sell anything, you consider supply and demand. The case of oil, a depletable resource, requires special considerations because it is depletable and must be produced in such a way so as not to destroy its market over time. How it is produced and its attendant price must consider its depletion so as to maximize the revenue overtime. Oil is essential for many uses, faces technical limitations how fast it can be taken from a well to preserve oil pressure, it has limited substitutes but is now under pressure from renewables, it is a pollutant and in fact it is a strategic commodity. As a strategic commodity with large suppliers limited to less than 20 countries, oil becomes a political commodity. Its supply has been also affected by wars, revolutions and more recently by U.S. economic sanctions on two countries with the largest oil reserve (Venezuela) and fourth largest reserve (Iran). The oil output of these countries has been devastated. And its price does not behave as smoothly as other goods that we are used to (for a technical rendering, see “Crude Oil Price Dynamics (2002–2006),” Hossein Askari and Noureddine Krichene, Energy Economics…

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Hossein Askari

MIT engineer-economist. Prof: Tufts, UT-Austin, GW. IMF Board. Government-Mediator Iran, Saudi Arabia, Kuwait. Econ-Finance, Oil, Sanctions, Mid-East, Islam.