Saudi Arabia has ended its flirtation with free oil markets.

It took the kingdom’s new oil minister, Khalid Al-Falih, just six months to blink, ending the country’s two-year policy of pump-at-will. 

The decision at this week’s meeting of the Organization of Petroleum Exporting Countries in Algiers to cut production was necessitated by Saudi Arabia’s tattered finances. The kingdom has the highest budget deficit among the world’s 20 biggest economies, may delay its first international bond issue and now faces fresh legal uncertainty after the U.S. Congress voted Wednesday to allow Americans to sue the country for its involvement in 9/11.

The decision at this week’s meeting of the Organization of Petroleum Exporting Countries in Algiers to cut production was necessitated by Saudi Arabia’s tattered finances. The kingdom has the highest budget deficit among the world’s 20 biggest economies, may delay its first international bond issue and now faces fresh legal uncertainty after the U.S. Congress voted Wednesday to allow Americans to sue the country for its involvement in 9/11.

And:

For all the justifications, the last two years haven’t panned out as Riyadh thought they would. At home, the kingdom has burned through more than $150 billion of foreign-exchange reserves, government contractors have gone unpaid, and this week the king announced unprecedented pay cuts for civil servants.

Saudi Arabia will suffer a fiscal deficit equal to 13.5 percent of gross domestic product this year, the International Monetary Fund estimates. When it comes to economic growth, Saudi Arabia is slowing sharply to about 1 percent this year while Iran, its nearby rival, is accelerating toward 4 percent.

David Fuller's view

Saudi Arabia was never likely to achieve more than a Pyrrhic victory in its attempt to bankrupt the USA’s shale oil industry.  In fact, the Saudis have been the biggest losers, burning through more of their once enviable financial reserves than any other oil producer. 

How could this happen?  The Saudi’s were looking for a replay of the 1970s, when they did damage US domestic oil production with the same tactic of competitive oversupply. 

What the Saudis did not fully understand two years ago, was the extent to which technology was changing the global energy industry.  Hydraulic fracturing, known colloquially as fracking, can now tap vast quantities of oil and gas reserves found in shale formations, and not just in the USA. 

Moreover, the combination of previously high oil prices and concerns over global warming have led to the development of renewable forms of energy, which are becoming increasingly competitive. 

(See also yesterday’s lead item: OPEC Agrees to First Oil Output Cut in Eight Years)