Lower Brent prices and Saudi policy options: What’s shale oil got to do with it?

Prof Lutz Kilian had earlier also said shale oil has very little to do with low oil prices in recent times.

In his recent piece, he revisits the idea and looks at options for Saudi (and other oil producers as well):

There is increasing concern about what a period of low oil prices might mean for the economic and political stability of Arab oil producers. There also is an ongoing debate about how oil-exporting countries such as Saudi Arabia should respond to this situation (see Fattouh 2014). The financial press has made much of alleged Saudi efforts to put shale oil producers (and other oil producers) out of business by not curtailing Saudi oil production. This overlooks the fact that Saudi Arabia has little choice in this matter – it wants to prevent its oil revenue from collapsing and the Saudi state-owned oil company is in fact not behaving any differently from private sector companies in similar situations (see Baumeister and Kilian 2016).
Regardless of one’s views about the relative importance of these determinants of low oil prices, it is likely that the Saudi economy could face another two or three lean years, at which point the precautionary savings in the Saudi sovereign wealth fund would likely be exhausted, while the prospects of new external borrowing would diminish. Thus, there appears to be no alternative to some measure of fiscal retrenchment in the foreseeable future. The same argument applies even more forcefully to other Arab oil producers faced with more foreign debt and lower foreign exchange reserves. A natural starting point for such reforms would be for policymakers to reduce or even phase out domestic subsidies on energy consumption. In fact, implementing such reforms is likely to be easier politically in an environment of falling oil prices. The United Arab Emirates, for example, have already successfully aligned their domestic fuel prices with prices in global markets. Other countries have yet to implement similar reforms.
Hmm..Nice bit on an area which is just full of noise..

One Response to “Lower Brent prices and Saudi policy options: What’s shale oil got to do with it?”

  1. Kathrin Says:

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