Their behaviour during the supply disruption caused by the Libyan civil war cast further doubt on the Saudis ability to act as the marginal supplier to the global market.
What’s more, the house of Saud announced a 100 billion dollar investment in renewable energy so that it could increase oil production.
The Saudis promised investments that would raise production to 15 million barrels. Recently, they have recanted on these promises citing the supply coming from Brazil and Iraq as sufficient to satisfy global demand.
All of this behaviour is very strange for the country with the supposed largest oil reserves in the world and the lowest cost of production. By their actions one should begin to question the truth of either of these two assertions.
The implication of Saudi Arabia being an “emperor who has no clothes” is that the cost of extraction of unconventional oil coming from sources like Brazil and Canada are much more likely to drive oil prices than marginal costs have in the past. Unconventional projects take a long time to complete, so we are unlikely to see the oversupply response we have seen in response to past price spikes.
The volatility in oil markets is going to increase, as unconventional production delivers an ever increasing share of the world’s production. Political crises and production disruptions will lead to immediate and severe price spikes in the absence of a moderating supply source.
Only a stable Iraq, with a significant investment in its field, could possibly replace Saudi Arabia as the “go to country” for incremental oil production in times of global disruptions. Imagine that.
Editorial note Jan. 07/12 : My refined thinking has it that oil demand continues to drive prices given the relative tightness between supply and demand. I wrote an article for the Geopoliitcs of Eenrgy which primary thesis was that oil demnad would be more volatile than suppy over the next 10-25 years.