Saudi Arabia is caught between a rock and a hard place when it comes to oil markets. The decline in oil prices from over a hundred dollars a barrel to the eighties is costing it a lot of money. But cutting the amount of oil produced and sold, in an effort to raise prices -- the role the Saudis traditionally have played -- has the short term effect of cutting income even more.

Before you weep tears of sympathy for the desert oligarchs, keep in mind that the Saudis have about a year’s worth of income held as reserves, so they can withstand a temporary income decline. But the share of world oil output accounted for by OPEC and the Saudis is in decline, thanks in large part to the fracking revolution pioneered by the infidel scientists in Houston and elsewhere. This means that there is a declining ability to manage prices by cutting or raising production.

Yesterday it was revealed by an anonymous source that the Saudis cut the amount of oil they supplied to markets in September, but in a curious fashion that suggests there may be some internal disputes over how to exercise the oil weapon. Wael Mahdi and Anthony DiPaola of Bloomberg report:

The amount of oil Saudi Arabia supplied to markets fell last month, according to a person familiar with the country’s oil policy. Its production climbed.

The world’s biggest crude exporter supplied 9.36 million barrels a day last month, a reduction of 328,000 barrels daily from August, according to the person, who asked not to be identified, citing policy. The supply figure excludes what’s stored. Saudi Arabia produced about 100,000 barrels a day more than in August, the person said. (snip)

“If this was an intentional cut by Saudi Arabia, I’d expect them to have cut the actual amount of oil produced and not just the supply to market,” Richard Mallinson, a London-based analyst at Energy Aspects Ltd., said by phone. “More is being read into the fluctuations than should be. I don’t see anything in these latest numbers to indicate a unilateral production cut.” (snip)

Saudi output in September was 9.7 million barrels a day, up from almost 9.6 million barrels a day in August, the person familiar with Saudi policy said. That’s the same as OPEC reported in its most recent market assessment.

So it appears that production is increasing, but supply is being cut, indicating the Saudis are building up their reserves of stored oil. How are they planning to use the oil? It could be that they are waiting for prices to rise, but that assumes the world’s economy will recover and increase demand, or that at the current price level, fracking production will decline. From what I have read, both outcomes are unlikely, as most fracking is economically viable far below a mid-80s per barrel price of oil, and the EU is experiencing deflation.

So the Saudi plans are a mystery. They could, if they wanted to, flood oil markets and depress prices even further, trying to drive fracking producers from the market and discourage new production. That could be the plan. Or it may be that the current situation is one of internal disagreement, and by keeping production higher than sales they are satisfying those who demand higher oil prices, while not antagonizing those who do not want production to be cut.

Caught in the middle are the other members of OPEC, including Venezuela, which is already reeling from economic chaos caused by socialism and corruption, and which is desperate for foreign exchange income from oil, which has declined as prices have fallen.  

Angola, Libya and Venezuela have all said OPEC needs to take action on prices, with the Latin American nation’s President Nicolas Maduro calling for an emergency meeting in a televised address Oct. 17. Global markets are oversupplied by about 1 million barrels a day and OPEC needs to reduce collective output by at least 500,000 barrels a day, Libya’s OPEC governor Samir Kamal said by e-mail yesterday, adding that his comments reflected personal views.

Tough times for OPEC, Venezuela, and the Saudis. Boo-hoo.