Oil oligopoly of Saudi Arabia and Russia

Department of Economics
Oil oligopoly of Saudi Arabia and
Russia
Student number: 2170087
Department of Economics University of Glasgow
Adam Smith Building Glasgow G12 8RT
Table of Contents
Abstract
Chapter 1-Introduction 1
1.1-Objectives 7
1.2 Research Questions...............................................................................................7
1.3-Hypothesis 7
Chapter 2-Literature Review 8
Chapter3-Theoretical Framework 16
Chapter 4-Methodology 20

Chapter 5-Analysis....................................................................................................21
Chapter 6-Results........................................................................................................30
Chapter 7-Discussion ....................................................................................................32
Chapter 8-Conclusion .................................................................................................40
Appendices
Bibliography
Abstract
In the current millennium, oil has become far more than just a commodity. It has turned
into a kind of an asset that is being pursued by the super powers and the worth of which is linked
with diverse financial and economic processes. In countries where trade associated with the
energy commodities has extended to a great level in total exports, an impact of oil price variation
is strongly felt. Saudi Arabia and Russia are the two states that come under such category. In a
recent meeting of the oil producing states in late 2017, OPEC decided to keep the level of

production going as Saudi Arabia refused to lose it market shares as well as its relevance in the
energy markets. Russia on the other hand does not want to run with lower prices as a good part
of its GDP comes from exporting oil. Hence, after some serious thinking over the matter, both
the countries have settled on an agreement in stopping the production for a limited amount of
time, knowing very well that would affect the world’s market. Stopping the production will
cause scarcity of oil, despite its massive consumption, which establishes that indeed oligopoly is
held Saudi Arabia and Russia in the oil industry of the world
Purpose of the paper is to analyze the oligopolistic behavior of these two states along
with exploring the main drivers behind this cartelization. The study also investigates in detail the
oil sectors of both the countries and the relationships amid oil rates and GDP of these nations in
order to estimate the level of dependence of Russia and Saudi Arabia on oil. Furthermore, the
study implies Game Theory to explain the case of oil oligopoly. Finally, by using different
statistical models, the paper concludes that the cartelization is out of convenience and seems to
be equally beneficial to both the nations. Where Saudi Arabia have a need for substantial oil
producing acquaintance so that it can resourcefully influence the market, Russia perceives this as
a likely prospect for a greater geopolitical and economic part in the Middle East.

CHAPTER 1
Introduction
In the last century, the oil industry has become one of the major industries that has
flourished over the years. The oil industry had initially no perfect competition, rather it was an
oligopolistic industry controlled mainly by OPEC (Organization of the Petroleum Exporting
Countries) members. A market that has a number of firms is known to be a perfect competition
but a market with limited firms is known as an oligopolistic market. Russia has often been a
member of OPEC (Bromley, 2005) and the policy of nationalizing the oil industry was also
implemented by Russia. However, since the cold war, Russia has lost many oil fields but it still
holds one-quarter of the oil supply in the world. Saudi Arabia is the leading country of OPEC as
it is also enriched with oil fields since the sands of time. This indicates the importance of Russia
and Saudi Arabia as oil-producing nations.
The era of the 20th century made possible the convenient accessibility of energy that has
proved to be a significant driver of development and industrialization. The non-renewable fossil
fuels have led way to the production of the majority of this energy. The existing worldwide
economy is immensely dependent on these fuels more than ever and quite particularly on oil. For
the contemporary manufacturing businesses, robust logistics is the main key to success. Majority
of individuals come far away from their houses to work and therefore, depend upon automobiles
for communication and traveling purposes. Today, oil-based plastics are being utilized as raw
materials by industries to manufacture numerous household and industrial merchandises. On a
macro-level, the spiking oil prices, likewise, effect economies and have been eliciting aspects in
economic cycles. On the other hand, the transitory truncated charges postpone essential energy
investments in existing and substitute sources that are required for safeguarding the global
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resources in the future. Furthermore, fluctuating rates also make it problematic for users to
acquire fresh consumption patterns and find suitable replacements. Along with the supply and
cost concerns, there are also environmental apprehensions, in which oil also plays a dominant
part.
Moreover, the political balance all around the globe also immensely shifts with the
fluctuations in the oil prices. With the augmented charges, the oil exporters attain power and
when it drops, they have to face great problems such as selling oil at reduced prices. History has
seen and proven over the time that the regulation and control of oil sources has compelled
countless nations into war. The year 1941 witnessed the U.S. placing an oil impediment over
Japan that obstructed almost 80% of its oil supply. Later on that same year, Japan, being
motivated by the oil embargo imposed by the U.S., joined the Second World War (Barros, 2011).
Similarly, the Gulf and the Persian War were also, nevertheless, partially driven by fortifying oil
supply (Shapiro, 2017). Additionally, whenever there is any conflict in any part of the world, the
natural resources automatically become at stake. Regardless of the huge international effects of
oil charges, there exists a diminutive agreement concerning the most imperative price drivers and
the basis of current instability. However, an inadequate supply capability, exploitation of
manufacturers’ market influence and methodical securities’ assumption seem to be primary
reasons behind the oil price fluctuations (Happonen, 2009). Also, there are numerous viewpoints
regarding the theories related to the depletion of global oil resources along with the concrete
outcomes of the ongoing enervation. Thereby, deficiency of information makes the industry
enigmatic, making it difficult to completely comprehend it.
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Figure 1: Factors Influencing International Oil Market (Pavlova, 2017).
For the past many decades, the Kingdom of Saudi Arabia has ruled over the oil industry
since it is the largest oil-producing nation. When the oil demand declined, the Kingdom
restricted its export together with the rest of OPEC and escalated the exports in times of
increased demand. During the recession in 1974–1975, 1998-2002, and 2008–2009, the country
proportionally constrained its exports. However, the Kingdom has also performed individually
from the rest of OPEC especially in such times when there was supply disruption somewhere
else in OPEC e.g. 1978 in Iran, 1980– 1981 in Iraq and Iran, 1990 in Kuwait and Iraq, 2003 in
Iraq, 2011 in Libya (Alkhathlan, 2014). In the above mentioned tenures, iinstead of
corresponding the export declines elsewhere in OPEC, the Saudis augmented their exports to
counterbalance the interludes. The association among the variations in Saudi oil exports and
vicissitudes in exports from the rest of OPEC clearly demonstrates the disparity in Saudi export
comportment over time (Suleiman, 2013) .
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Furthermore, Russia being the largest non-OPEC oil producing country, has a resilient
record of mutually reassuring OPEC to make cuts during the times of truncated oil charges
while, also encouraging, but not providing, and decreasing the exports itself. For several years,
Russia has acted as a price taker. In 1998, Russia along with the Asia, faced financial crises
because oil prices decreased as a result of OPEC decision to upsurge the output that concurred
with a descent in oil demand (Economist, 1999). Later in 2001, when the incident of World
Trade Center happened, the prices fell down from $36/bbl to $20/bbl with the international
economic downturn. In this period, OPEC was relying immensely on Russia to bring about the
cut of 500,000 b/d. Russia, whose output was more than twofold as high, at first offered only
30,000 b/d. then again in the years from 2008-2009, when the oil prices sharply plunged from an
elevation of $147/bbl to a low of $39/bbl, Russia offered no help despite its encouraging the
OPEC to constraint the production (Times, 2009). Consequently, it became clear over all these
years that the country has espoused an unswerving track that it acts a price taker regarding the oil
market, and has presumed that OPEC, along with Saudi Arabia, will constantly be the first to
respond and cut production to rebalance the market. The country supports its stance by
presenting the fact that their capacity to regulate drifts is restricted by geography (Reuters, 2016).
Nonetheless, it seems somehow clear from the past actions of the country that the Russian
government would quiet desire to have OPEC decrease the output and open ride on the price
upsurge instead of establishing a multifaceted set of provisions amid several private corporations
itself.
With the history of Russia’s constant reluctance to execute assurances made to OPEC in
mind, it is not much of a surprise that OPEC’s most imperative affiliate, Saudi Arabia, interprets
any exchange of a dialogue to deliberate over the cuts with mistrust and great cautiousness.
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Rather, the country would act against the Kingdom’s oil policy to arrange consultations without
formerly approving upon the prospective consequences in advance along with a nearly total
uncertainty that an affirmative result would be achieved that could lead to a considerable
influence on oil market balances. Nevertheless, the Kingdom also firmly believes that a
consultation that results in no vibrant and productive outcome is far worse than no consultation
in the first place.
Besides, the framework of Saudi Arabia’s inclusive strategy towards oil market
controlling and administration should be kept in view. When the recent oil prices reduction
occurred since 2014, it became clear that the Kingdom will not cut down its production
exclusively, and also that any output cut has to be a mutual determination while collaborating
with both the OPEC and non-OPEC producers (Fattouh, 2015). Nonetheless, there are two vital
producers within the OPEC i.e. Iran and Iraq, which have to be involved with the joint strategy,
and transported back steadily into the quota system. The other main non-OPEC producer stands
out to be Russia that has unrelentingly augmented its production during the course of the
previous decade and a half and has undoubtedly displayed no restriction throughout the era of
weakness over the former 12-18 months (Legucka, 2017). The stance for collaboration with Iraq
and Iran is considered to be intricate, but then in any case, the foundation for conciliation is
vibrant inside an OPEC framework. Likewise, it appears to be probable that economic
compressions in Iraq can push the state to cut back on its striving development policies, which
means that production will not be the same in the current year as was in the previous one. It may
also take more time for Iran to reinstate its production to pre-sanctions levels that it’s
anticipating. In such a scenario, the Russian perception becomes difficult and more complex to
comprehend since it has been directing quiet contradictory indications (Henderson, 2016).
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