Abstract
The November 2014 Saudi gambit to increase oil production and drive down prices was a deliberate decision to quell the shale oil revolution. Ostensibly, that decision has been very costly to the Saudis, but the relevant question is would they find themselves worse off had they not acted. This paper presents a counterfactual analysis of that decision and finds that to have continued to cut production to sustain high prices would have been worse yet. Consequently, because of the shale revolution, future oil prices appear likely to fluctuate between a new floor and new ceiling price. A critical question then becomes what role will OPEC play in affecting prices within this new range of variation. This paper presents two contrasting views.
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