Not since the early 1980s has Saudi Arabia seemed so powerful. But the kingdom's dominance of the oil market could prove fleeting, as policymakers grapple with multiple challenges that could slash export earnings by 2020.
For now, Saudi Arabia is the unrivalled master of the oil market. The kingdom holds virtually all the world's spare production capacity. Iran, its main rival within OPEC, has been sidelined by sanctions. Saudi output is at an all time high, while Iran's exports have halved.
Saudi officials make a show of consulting with OPEC, but the kingdom is the undisputed swing producer, and all important production decisions are being made in Riyadh.
Over the next five years, however, the kingdom will be confronted by multiple problems that seem likely to squeeze its share of the global oil market and put export revenues under severe pressure.
Shale oil is emerging as a major rival to conventional producers. Saudi Arabia will also have to accommodate growing output from Iraq, the eventual normalisation of exports from Iran when the nuclear issue is resolved, and rising output from new oil fields in Latin America and Africa.
The kingdom has still not managed to slow its growing combustion of oil and gas for domestic electricity production, which threatens to shrink the amount available for export. And there has been no progress in diversifying the economy away from reliance on oil export revenues.
SAUDI ARABIA'S BURDEN
The Saudi political and economic model depends on maintaining production at around 9-10 million barrels per day while keeping prices high. But the kingdom faces a growing threat from competing sources of supply that are economic at prices well below the current $110 per barrel and hungry to capture market share.
Saudi Arabia's giant conventional oil fields will ensure that it remains the biggest low-cost exporter. But it is likely to face an increasingly uncomfortable trade off between supporting prices and maintaining market share.
Saudi Arabia has faced this problem before. Between 1981 and 1985, Saudi production fell almost two-thirds, from 10.3 million barrels per day to just 3.8 million, and its share of the global market dropped from 16 percent to 6 percent, as the kingdom tried to re-balance the market ().
Saudi Arabia was forced to cut its own production to accommodate rising supplies from the North Sea and North America, quota cheating by other members of OPEC, and falling demand following the second oil shock in 1979-81.
"Huge new (oil) developments were taking place outside OPEC," as chronicled by Daniel Yergin in "The Prize," his magisterial history of the oil market.
"The major build up of production in Mexico, Alaska and the North Sea coincided with the turmoil of the second oil shock. Egypt was also becoming a significant exporter. So were Malaysia, Angola and China. Many other countries became producers and exporters, minor league in themselves but significant in the aggregate".
"Major innovations were also improving exploration, production and transportation technologies."
"Significant changes were also taking place in demand," Yergin wrote. "The massive twentieth century march toward higher and higher dependence on oil within the total energy mix was reversed by higher prices, security considerations and government policies."
It all sounds very familiar. Over the last decade, the escalation in Brent prices from $20 in 2002 to more than $110 in 2012 has induced a similar response. Surging exploration and production activity is now translating into rising output outside OPEC and the Middle East, while determined conservation measures are cutting oil consumption across North America and Europe.
Just as in the early 1980s, Saudi Arabia may struggle in the next few years to achieve an acceptable price, which officials put around $100 per barrel, for all the oil it wants to sell.
TWILIGHT IN THE DESERT?
The threat of too much rival oil and falling export revenues is a remarkable turnaround since the middle of the last decade, when oil analysts were worried about Saudi Arabia's ability to keep pace with growing global demand, amid fears that global production was peaking.
In his controversial monograph "Twilight in the Desert," energy consultant Matthew Simmons warned that Saudi Arabia would struggle to maintain let alone increase production as output from its ageing super-giant fields went into decline.
Published in 2005 when fears about peak oil were at their height, and provocatively sub-titled "the coming Saudi oil shock and the world economy," the book now feels rather dated as a result of the shale revolution.
But it is a reminder that oil is a cyclical business in which supply shortages, price spikes and revenue booms have always been followed by a bust, with prices sinking low enough for long enough to force developers to abandon new projects. This time is unlikely to be any different.
The massive rise in prices means Saudi Arabia will face intense competition from shale, conventional exploration off the coasts of Latin America and Africa, and even more hostile environments like the Barents Sea and the Arctic.
If the price gap between oil and gas remains sufficiently wide, gas is also likely to grab increasing share of the transportation market, where compressed natural gas (CNG), liquefied natural gas (LNG) and even gas-to-liquids (GTL) are all attractive alternatives with gas prices below $8 per million British thermal units and oil prices above $90.
Compounding the problem, projected oil demand is now expected to grow much more slowly than a few years ago as a result of conservation measures.
Conservation has so far mostly been limited to the advanced industrial economies, where the United States and the EU have both enacted tough new efficiency standards for vehicles.
But as the United States, Europe and Japan reduce their oil-intensity, emerging markets like China will come under pressure to follow suit or develop their own domestic resources to avoid becoming uncompetitive.
All these problems for Saudi Arabia (rival supplies, substitution, conservation and growing domestic oil and gas burning) are likely to materialise over the 2015-2020 timeframe.
MANAGING THE OIL PRICE LOWER
Saudi Arabia's challenge will be to manage the price of oil down to the point at which the urgency goes out of energy conservation and some of these rival supply projects are cancelled. If the kingdom cannot manage the price down, the market will eventually adjust of its own accord, just as it did in the 1980s, which will be much more disruptive.
Prices are unlikely to sink back to the levels prevailing in the 1990s (around $30 to $40 after adjusting for inflation). But price falls to $50, $60 or $70 are quite conceivable.
Anyone who thinks prices could not fall that low because of the high cost of marginal supplies like Canada's tar sands, shale oil wells and deepwater is ignoring a lesson from history that prices can fall below marginal costs for quite a long time before the supply and demand rebalance, as well as the amount of cost-reducing technical progress that is being achieved within the industry.
Even a real price of $70-80 per barrel might seem quite uncomfortable for Saudi Arabia, given the rise in the kingdom's social spending, particularly if it was accompanied by a drop in volumes as a result of competition for market share and rising domestic consumption.
Saudi Arabia probably needs a modest decline in oil prices now to avert a much larger crash later, as well as a more determined effort to cut wasteful domestic energy consumption and diversify the economy away from its over-reliance on oil export revenues.
The kingdom has received a remarkable windfall from high prices over the last decade. Now it must show that it has not been squandered.