Saudi Arabia Retakes Role As Primary Swing Energy Supplier

Fluctuating Chinese demand has contributed to the volatility of international oil prices this year.

Photo Insert: Saudi Arabia, in particular, has re-established itself as the most important swing producer and thus the most influential marginal price-setter.

However, the most recent supply-side shift will have immediate geopolitical and financial ramifications that extend far beyond the oil market.

Saudi Arabia, in particular, has re-established itself as the most important swing producer and thus the most influential marginal price-setter. However, it is unclear how long this situation will last, Mohamed A. El-Erian wrote for Project Syndicate.

The consequent demand-side effect of China on oil prices is widely acknowledged. The country is large, with extensive energy needs and high-intensity consumption, and it is heavily reliant on outside suppliers.

El-Erian, president of Queens' College at the University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania, and the author of "The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse" (Random House, 2016).

The composition of price determinants on the supply-side has been far less consistent, adding to the intrigue of the tug of war with demand effects. Consider how the dominant influences in the oil market have changed over the last 15 years to understand this emerging dynamic.

First, OPEC's long-standing dominance, de facto led by Saudi Arabia, has waned as a result of the explosive growth of shale producers, including those in the United States. The swing-producer role, which is critical for limiting large price overshoots in either direction, has thus shifted to them, away from Saudi Arabia and its OPEC allies.

Saudi Arabia and Russia agreed in 2016 to establish an expanded output-quota arrangement in an attempt to re-establish OPEC's influence on the oil market. This coalition, known as OPEC+, restored the effectiveness of production ceilings announced by its members.

However, in subsequent years, growing concerns about climate change and the related urgent need to reduce reliance on fossil fuels undermined its lead price-setting role.

However, Russia's invasion of Ukraine in February halted the apparent long-term deterioration of OPEC+'s global economic and political role. The resulting Western sanctions disrupted Russian oil supplies, contributing to higher prices.

As a result, there is a renewed awareness of Saudi Arabia's importance in the oil market, with a growing number of Western leaders urging the kingdom to lower prices.

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