Saudi oil price policy has been much in the news lately. Why did the Kingdom decide to hold production levels and allow oil prices to crater? Why didn’t Saudi Arabia move to protect oil prices by reducing its production?

A number of reasons have been postulated, including a few conspiracy theories: For example, some suspect that the Saudis and the US want to pressure the Iranians and the Russians; or that the Saudis want to pressure US shale producers; and that the Saudis want to maintain market share as the Libyans re-enter the market. Certainly, recent political events provide plenty of opportunity for side deals. The US does want to pressure the Russians and Iranians, and US involvement is necessary for a coordinated effort to counter the threat of ISIS in Iraq and Syria. If oil prices are determined in smoked-filled back rooms, then certainly the motive and opportunity have been present. The Saudis and the Americans have an incentive to cooperate.

On the other hand, Saudi actions are also consistent with the Kingdom’s long term strategic interests. To understand Saudi Arabia’s view of oil supply cuts, it is necessary to revisit the lessons of 1979. That year saw the Iranian Revolution, followed by the Iran-Iraq war in 1980. These disrupted oil markets, and prompted OPEC to decide on a high oil price policy.