Russia and Saudi Arabia in Crude Position Post Doha Talks

Saudi Arabia and Russia are both stuck between a rock and a hard place. If they ramp up production to supplement budget deficit spending then they face the prospects of reduced revenues, should production lead to further price declines via an absence of a reciprocal aggregate demand in quantity. On the other hand, if they freeze or cut production, they may still face falling revenues as a decrease in supply doesn't necessarily equal higher prices with static demand, that would lead to increased revenues.

Furthermore, since the US is now the third-largest oil producer in the world (almost neck and neck with Saudi Arabia), a significant part of oil production policy in Russia and the Middle East now has to factor in more than basic market fundamentals. The effects of any action that artificially manipulates supply now have to be factored in with US shale producers and their affect on supply dynamics. If a production freeze does lead to higher prices, shale oil producers will resume production and benefit asymmetrically as their output levels are not subject to OPEC policy makers. Higher crude prices means higher revenues for the producer with the largest quantity of output, and shale oil producers will take advantage of that opportunity. A production freeze in this sense does not entirely benefit Saudi Arabia as they lose the opportunity to price less efficient producers out of the market; therefore a freeze is a sort of boon to the shale industry as well as a headwind for Saudi government revenues.

For the moment, the most viable option for the Russian and Saudi governments appears to be to let the market decide where crude oil will trade, based on supply/demand fundamentals and the prospects for global economic growth.