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The dynamics of the revenue maximization–market share trade-off: Saudi Arabia’s oil policy in the 2014–15 price fall

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  • Bassam Fattouh
  • Rahmatallah Poudineh
  • Anupama Sen

Abstract

Given its highly undiversified economic base, maximizing revenues will always rank highly in Saudi Arabia’s output decision. However, this objective needs to be balanced against another—maintaining its share in key markets and maximizing long-term revenue—given the massive size of Saudi Arabia’s reserves. The trade-off between these two objectives tends to change over time, depending on market conditions, the nature of the shock, and the behaviour of other producers; Saudi Arabia’s oil policy is hence not constant. We argue that the advent of US shale has made the calculus of the trade-off more uncertain, complicating Saudi Arabia’s output decision. Using a simple game, we show that, under uncertainty, it is always safer for the Kingdom to assume that the shale oil supply is highly elastic, and thus decide not to cut output. But as Saudi Arabia learns more about this new source of supply, its policy could adapt accordingly. The fact that Saudi Arabia’s oil policy could change as the trade-off between revenue maximization and market share evolves, and as new information to the market arrives, will keep the market second guessing and will continue to shape market expectations and to influence market outcomes.

Suggested Citation

  • Bassam Fattouh & Rahmatallah Poudineh & Anupama Sen, 2016. "The dynamics of the revenue maximization–market share trade-off: Saudi Arabia’s oil policy in the 2014–15 price fall," Oxford Review of Economic Policy, Oxford University Press, vol. 32(2), pages 223-240.
  • Handle: RePEc:oup:oxford:v:32:y:2016:i:2:p:223-240.
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    File URL: http://hdl.handle.net/10.1093/oxrep/grw010
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    Citations

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    Cited by:

    1. Abdulaziz A. Alotaibi, 2019. "Budget Policies During and After the Oil Crisis of 2014: Comparative Analysis of Saudi Arabia, UAE, and Kuwait," International Business Research, Canadian Center of Science and Education, vol. 12(6), pages 23-28, June.
    2. Dagoumas, Athanasios & Perifanis, Theodosios & Polemis, Michael, 2017. "An econometric model to assess the Saudi Arabia crude oil strategy," MPRA Paper 86283, University Library of Munich, Germany.
    3. Al Rousan, Sahel & Sbia, Rashid & Tas, Bedri Kamil Onur, 2018. "A dynamic network analysis of the world oil market: Analysis of OPEC and non-OPEC members," Energy Economics, Elsevier, vol. 75(C), pages 28-41.
    4. Alberto Behar & Robert A. Ritz, 2016. "OPEC vs US shale oil: Analyzing the shift to a market-share strategy," Cambridge Working Papers in Economics 1623, Faculty of Economics, University of Cambridge.
    5. Khalifa, Ahmed & Caporin, Massimiliano & Hammoudeh, Shawkat, 2017. "The relationship between oil prices and rig counts: The importance of lags," Energy Economics, Elsevier, vol. 63(C), pages 213-226.
    6. Lutz Kilian, 2017. "The Impact of the Fracking Boom on Arab Oil Producers," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    7. Alberto Behar & Robert A Ritz, 2016. "An Analysis of OPEC’s Strategic Actions, US Shale Growth and the 2014 Oil Price Crash," IMF Working Papers 16/131, International Monetary Fund.
    8. Ansari, Dawud, 2017. "OPEC, Saudi Arabia, and the shale revolution: Insights from equilibrium modelling and oil politics," Energy Policy, Elsevier, vol. 111(C), pages 166-178.
    9. Dagoumas, Athanasios & Perifanis, Theodosios & Polemis, Michael, 2018. "An econometric analysis of the Saudi Arabia's crude oil strategy," Resources Policy, Elsevier, vol. 59(C), pages 265-273.
    10. Behar, Alberto & Ritz, Robert A., 2017. "OPEC vs US shale: Analyzing the shift to a market-share strategy," Energy Economics, Elsevier, vol. 63(C), pages 185-198.
    11. Berk, Istemi & Çam , Eren, 2019. "The Shift in Global Crude Oil Market Structure: A model-based analysis of the period 2013–2017," EWI Working Papers 2019-5, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).

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