Supply, demand and oil
It is not in the economic interests of Saudi Arabia or the world economy to manipulate oil production in an attempt to provide stability in oil markets. As oil is a depleted natural resource, its value when extracted in the future is higher than at present. Saudi Arabia ought to pursue a production policy compatible with its own economic interests. Its development is based on the conversion of its subsoil resources into other assets such as plants, equipment, education and technology. Obviously the conversion process can be carried on at different rates. An optimum rate is that at which oil should be pumped so that the present discounted value of the income created in the conversion process is maximized.
Saudi Arabia has sold and is selling far more oil than it would if these basic economic principles were observed. The excess â the difference between the volume of oil actually supplied and the volume that should be supplied in the strict observance of the national economic interests of Saudi Arabia â is in fact a subsidy it grants the West, Japan and other oil-importing nations.