On February 11, 2015, the Dallas Federal Reserve Chair stated that Saudi Arabia was to blame for the oil crisis. Speaking at the Economic Club of New York, Richard Fisher cited Saudi Arabia’s desire to damage its rival Iran as a cause and effect of low prices. He further noted that while the Saudis were able to withstand low prices, and that other parts of the world could not. He described the impact on Texas as substantial but not sufficient to overwhelm its diversified economy. The Federal Reserve is not a U.S. Government entity, but its Member Banks make and carry out monetary policy through its system of Policy Committees and Federal Reserve Banks.

A Debate Over Causes

As the price of crude oil fell on international benchmarks from highs in June, 2014 to lows in December, a significant debate occurred as to the cause of the collapse. Many observers expected OPEC to act to correct the supply and demand imbalance that deepened and caused oil prices to fall sharply. Prices also fell because worldwide demand weakened. In the past, Saudi Arabia acted regularly to correct supply imbalances. In the absence of a decisive move by the Saudis, oil prices fell as the supply of crude oil outpaced demand. When faced with severe price reductions, OPEC considered but did not approve lower production quotas. Saudi Arabia did not overrule objections from members who expressed a need for revenues including Nigeria and Venezuela.

Historical Perspective

In the oil crashes of the 1980s and 1990’s, Saudi Arabia took a leading role in marshaling discipline among producers. It led by example and reduced production, and supported lower quotas to restrict supply and increase prices. Having lost market shares in each instance, the Kingdom has altered policy and gives priority to maintaining its market shares and expanding markets during low price environments. Recent actions indicate the importance of market share; the kingdom raised prices to the United States and Europe while lowering them to Asian markets.

Pros and Cons of Low Oil Prices

The low price of oil has advantages and disadvantages. Saudi Arabia is uniquely well equipped to tolerate low price environments; they have large cash reserves, nearly $900 Billion dollars. They can continue government and social programs without interruption. The low price environment creates difficulties for Saudi Arabia’s competitors. The United States shale industry depended on a price point above $70 per barrel. Russia and Iran state budgets required oil at well above $100 per barrel.

In a Price Showdown-No One Blinked

It appears somewhat unrealistic to blame Saudi Arabia for the oil crisis. American consumers bore the weight of shale oil success. With the break-even points in the range of $75-80 per barrel, shale oil developers provided American oil independence at world market prices. The U.S. producers paid little heed to global conditions and instead filled the market with domestic crude. As U.S. oil imports fell, domestic oil production increased. It appears the Saudis have acted in the same way as U.S. producers, and strove to fill every available niche and position in the marketplace. United States policy restricts exporting crude oil, and domestic producers did not slow production as the market became oversupplied. Both the United States and Saudi Arabia gained strategic advantages from falling prices. The United States gained leverage against Russia as its economy could not withstand the sharp loss of oil revenues.