Six years ago, the price of oil went on an incredible roller-coaster ride. In January 2008, oil hovered around $90 a barrel. By July, it had reached $147 a barrel. By the end of the year, it had plunged to under $35 a barrel.
Saudi Arabia, and the other members the Organization of the Petroleum Exporting Countries, hate that kind of volatility.
When prices are too high, OPEC's customers, the petroleum importing countries, suffer economically, which means they cut back on energy use and search for alternatives to oil.
But if prices go too low, many exporting countries face enormous financial problems because their economies depend on oil staying in the $100 to $130 range, according to 2015 projections.
We tend to think of OPEC as a cartel whose goal is to set the price of oil - and set it high. But stability is also an important goal. Without a cartel controlling supply, oil can be the most volatile of commodities.
Which, of course, we are learning anew, as we've watched oil fall from $115 a barrel to about $60 in the last six months. In 2008, Saudi Arabia stepped in both when the price was rising rapidly and again when it dropped. And guess what happened? Nothing. Most of the rest of OPEC didn't follow Saudi Arabia, and the Saudis were exposed as having lost their ability to single-handedly control the price of oil.
This time around, what has been most noticeable as the price of oil has dropped is that the Saudis seem completely uninterested in trying to prop it up. The Saudi oil minister, Ali al-Naimi, gave an interview to CNN in which he declared that Saudi Arabia would "never" cut production, despite the steep drop this year. "We are going to continue to produce what we are producing," he said. "We are going to continue to welcome additional production if customers come and ask for it."
Part of the reason for this new Saudi attitude is that the country's leaders are tired of doing all the heavy lifting for the other OPEC members — who then keep their spigots completely open and take advantage of the high prices the Saudis are making possible.
Part of it is that the Saudis are unwilling to lose market share to other countries, and they have the wherewithal to withstand lower prices for a much longer period than virtually any other exporter. But part of it is also that Saudi Arabia doesn't want a repeat of 2008.
"The worst thing from the Saudi point of view would be to announce a production cut, and the prices keep falling," said Jason Bordoff, the founding director of the Center on Global Energy Policy at Columbia University. It doesn't want to be seen as the emperor with no clothes.
And then, of course, there is the effect of the shale revolution in the United States, where oil production has risen to 9 million barrels a day from 5 million a day in the space of six years.
The conventional wisdom holds that the Saudis "fear" the influx of shale oil onto the market - as The Wall Street Journal put it Monday - and that they want to see the price go down in order to drive out some of that shale production.
But the Saudis don't really fear shale oil. "I've heard officials in Saudi Arabia call shale a blessing," said Robert McNally, the founder and president of The Rapidan Group, who is also affiliated with the Center on Global Energy Policy. "Shale oil is light," he added. "Saudi oil is medium and heavy, and their real competitors are the Iraqis and the Iranians." The Saudis can adjust to shale oil more easily than many other countries.
In effect, shale has the potential to play the role of the "swing supplier," which is the role the Saudis used to play. At a certain price, it will be uneconomical to drill for shale oil, at which point the price will stabilize. But the shale revolution is still too new to know what that price is. In a sense, what is going on now is an effort to discover how low oil has to go before shale production declines and the floor is found for the price of oil.
OPEC, McNally reminded me the other day, is hardly the first group to try to control the price of oil. In the early years of the industry, John D. Rockefeller's Standard Oil controlled the price. For decades before the formation of OPEC, the Railroad Commission of Texas (now the Texas Railroad Commission) would have a monthly meeting to set production quotas.
More than anything else, the events of these past months, as oil has dropped and dropped again, show that it is the market, rather than a cartel, that will dictate the price of oil for the foreseeable future.
Hold on to your seat belt.
New York Times