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I'm wondering whether one of Saudi Arabia's principle motivations for supporting OPEC production cuts is so that the price of crude oil will increase and so Saudi Aramco, Saudi's state-owned oil company, will be valued higher prior to its upcoming IPO?

I would appreciate any help understanding whether this is the case.

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migrated from money.stackexchange.com Nov 23 '16 at 23:59

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  • $\begingroup$ It's definitely a plausible motivation. $\endgroup$ – quid Nov 23 '16 at 18:00
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You could think this in terms of an oligopoly. As an imperfect market, firms get more profits than possible in a competitive market because decisions around levels of production influence prices. All members of the OPEC have an incentive to reduce production as a whole (to raise prices), and an incentive to increase production individually (to earn more profits at those higher prices).

You can also consider political issues like production outside the cartel: they don't hold a monopoly and the higher the OPEC raises prices, firms with costlier ways of extracting oil (like fracking in the US) can turn a profit and compete with them, which naturally reduces profits (and value).

While the IPO may be a possible explanation, you can think of it in terms of oligopolies and still get a reasonable answer.

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