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Crude Economics
Petrostates Trying Not to Panic as Oil Drops Below $50

West Texas Intermediate crude—America’s benchmark oil price—dropped below $50 per barrel this week for the first time in more than five years. Brent crude, Europe’s benchmark and the more typical stand-in when we discuss the “global” oil price, is hovering just above $50 per barrel, less than half of what it was trading for last June. Consumers and businesses (at least, those firms not involved in oil production) are rejoicing, and gas prices in the United States are on a record decline. Meanwhile, the world’s petrostates are quaking in fear as they gaze upon a market whose bottom has apparently not yet been reached. In other words, it’s a good time to buy crude, a bad time to sell, and a very bad time to derive the majority of one’s national government from crude sales.

We’ve hit on breakeven prices before—the price that a specific country, firm, or oil play requires in order to profitably operate—but it’s worth revisiting in the light of this continued rout. Consider the following chart:

OPEC members like Venezuela and Iran are in a very bad way, as the inability to sell their crude for the right price is running up massive budget deficits in both nations. Russia’s geopolitical calculations are surely being affected by the bear market as they face an economic recession. Many U.S. fracking operations are being threatened by today’s market, though advances in drilling efficiency will continue to bring that level down. Notice Saudi Arabia’s breakeven price, and contrast it with King Abdullah’s recent comments on the issue, via the Hill:

“These tensions aren’t new to the oil market, and we’ve dealt with them in the past with a solid will, with wisdom and experience, and we will deal with the current developments in the oil markets in the same way,” Abdullah said.

So far, though, the Saudis haven’t dealt with this price plunge in the same way OPEC historically has, refusing to stabilize prices by cutting cartel production. If there’s any silver lining from the Saudi point of view, it’s that $50 per barrel oil hurts Iran far more than it hurts themselves. But for a country which relies on oil exports for some 75 percent of its budget, this kind of policy is not without its risks and downsides.

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  • FriendlyGoat

    Some of the states in the United States are going to notice fiscal effects from this too.

  • Andrew Allison

    A chart of government breakeven price should not include the USA, which is not by any stretch of the imagination a petrostate. FWIW, the US producer breakeven cost is currently under $50/bl and falling. Note in that it’s production growth, not production which is being discussed.

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