Saudi Arabia’s Hostage

oil-jack-pumps-sun-riseAlmost two years ago, the increased oil production by Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, drove down oil prices to nearly $50/bbl, the price at which many shale producers could not break-even, initiating an economic oil war against the United States. But their plan has backfired, since OPEC has failed to crush the U.S. shale industry, which as a result of increasing efficiencies has seen its production costs fall. This has made far cheaper oil prices profitable again.

Saudi Arabia and other OPEC members are meeting in Algeria this week and may consider freezing production in an effort to shore up prices. They are prepared to slash production by as much as half a million barrels. Oil prices rose modestly ahead of the meeting of producers from the OPEC cartel and Russia in Algeria that could agree to cap supplies.

Saudi Arabia’s state-owned oil giant Aramco plans to invest a total of about $334 billion by 2025, including spending on infrastructure and projects to maintain oil capacity. This will be spent on material and services to support service facilities, infrastructure projects, drilling and maintain (oil) potential projects, unconventional resources both in the exploration phase and development and several other projects. Saudi Arabia has indicated that it may sell a 5 percent stake in Saudi Aramco through an initial public offering.

A central factor in the sharp price drops, analysts say, is the continuing unwillingness of OPEC to intervene to stabilize markets that are widely viewed as oversupplied. One reason Saudi Arabia has dominated the world oil market is that they have more oil that is easier to produce than anyone else.

Earnings are down for oil and gas companies that have made record profits in recent years, leading them to decommission nearly two-thirds of their rigs and sharply cut investments in exploration and production. More than 200,000 oil workers have lost their jobs, and manufacturing of drilling and production equipment has fallen sharply.

OPEC was, ironically, one of the enablers of fracking (yield-desperate investors, driven to near insanity by the Fed’s zero-interest-rate policy, were the other one). And now fracking is threatening to make OPEC irrelevant.

Saudi Arabia, formerly the dominant oil producer in the world, the country whose mere words could shake up markets and manipulate US policies in the Middle East, and the master of an all-powerful OPEC, is reduced to struggling for simple market share, the hard way.

Oil is plunging due to oversupply from the US and OPEC countries, a strong dollar, and weak demand. The US has to continuously drill more wells to maintain current production levels and offset the high depletion rates of these wells.

Saudi officials have said that if they cut production and prices go up, they will lose market share and merely benefit their competitors. They say they are willing to see oil prices go much lower, but some oil analysts do not think they are serious.


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