Saudi Arabia should behave instead like a central bank that periodically conducts auctions for government paper. The interest rate -- or, in this case, the price of oil -- is then determined by the result of auctions and trading on the secondary market. Saudi Arabia, after all, is and acts like the central bank of global oil.
If Saudi Arabia allowed its crude to be traded -- that is, sold by the original buyer to some other final or intermediate client -- the abundant availability of Saudi oil would drive prices down. But the Saudis are afraid of playing an active role in the market because they do not want to be accused of "controlling" the price of oil. There is, however, a lot of ground between "controlling," at one extreme, and exercising no influence on the market on the other. It is in fact unlikely that Saudi Arabia could "control" the price even if it took a very active role in the market -- but it could certainly have an influence. Yet, the stereotype of OPEC as a monopolist intent on squeezing consumers is so deeply rooted that Saudi Arabia does not want to be seen influencing prices at all.
The United States and other leading consumers should encourage Saudi Arabia to play a more active role. A global oil market in which Saudi Arabia exerts its proper influence would be less volatile and more closely representative of the equilibrium of supply and demand. It is in our best interest that Saudi Arabia should succeed in moderating prices.
As the revival of oil and gas production in North America and in other parts of the world gains strength, it will be in the interest of all to maintain prices at a level that is neither too low nor too high. A much lower price would nip the expansion of new sources in the bud, while higher prices could abort the fragile economic recovery. Saudi price targets, which lie in a band that hovers around $100 per barrel, are not out of line with the interests of the industrial countries.
Saudi Arabia should be supported, and even urged, to be a price leader rather than a price taker. Oil prices should be discussed in the context of G-20 and other international gatherings much in the same way as interest rates or exchange rates are. No market can function well if the No. 1 supplier remains on the sidelines. Getting Saudi Arabia in the game will be good for American consumers, and bad for the mullahs in Tehran.