Because the Saudis had historically used their excess capacity to mitigate the effects of short-run supply shortfalls, many analysts had assumed that they would continue to do the same in response to the longer run pressure of growing world demand, and most forecasts called for continuing increases in Saudi production levels over time.
For example, even as recently as in their 2007 World Energy Outlook, the International Energy Agency was projecting that the Saudis would be pumping 12 million barrels per day by 2010. In the event, however, Saudi production went down rather than up in 2007. It is a matter of conjecture whether the decline in Saudi production in 2007 should be attributed to depletion
of its Ghawar oil field, to a deliberate policy decision in response to a perceived decline in the price-elasticity of demand, or to long-run considerations discussed below.
Whatever its cause, the decline in Saudi production was certainly one important factor contributing to the stagnation in world oil production over 2005-2007. It also unambiguously denotes the latter episode as a new era as far as oil pricing dynamics are concerned— without the Saudis’ willingness or ability to adjust production to smooth out price changes, any disturbance to
supply or demand would have a significantly bigger effect on price after 2005 compared with earlier periods
