Target revenue theory and Saudi Arabian oil policy

Abstract

Shifts in Saudi Arabian oil policy are explained by using data covering public revenues and expenditures plus the balance of payments. It is concluded that, according to the target revenue theory, Saudi Arabia only for a very short time after the first and second oil crises was on the backward sloping part of the supply curve. Perhaps Saud Arabia cut oil production during the two oil crises because it wanted big oil price increases to prevent budget cuts. In any case, it started to increase oil production in the middle of 1985 when its economy was in great imbalance. Furthermore, calculations for the period 1989–2000 reveal that Saudi Arabia will probably face economic problems in the 1990s so that it will not again be OPEC's swing producer. On the contrary, Saudi Arabia will probably increase its share of OPEC's oil production in the 1990s.