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Crude Economics
Saudis Speed Up in Game of Chicken With US Shale

Last month Saudi Arabia pumped more crude than at any point since we started keeping track, setting a record at a time when an oversupplied market has pushed the global price of crude well below the level Riyadh needs to balance its budget. Bloomberg reports:

The world’s biggest oil exporter pumped 10.564 million barrels a day in June, exceeding a previous record set in 1980, according to data the kingdom submitted to the Organization of Petroleum Exporting Countries. The group sees “a more balanced market” in 2016 as demand for its crude strengths and supply elsewhere falters […]

OPEC’s 12 members raised production by 283,200 barrels a day to a three-year high of 31.378 million a day last month, according to external estimates of output cited by the report. This data included a lower figure for Saudi production of 10.235 million barrels a day.

The price of crude is roughly half of what it was a year ago. That’s in large part due to booming production from within OPEC, but also from without, as American shale firms have threatened to knock the world’s petrostates off of their perch. The Saudis have pushed an OPEC strategy of inaction, hoping to squeeze those fracking companies out of the game by keeping production high (shale plays are much more expensive to plumb than conventional fields). Indeed, the FT suggests that may explain why the Saudis are keeping output so high, reporting that “Riyadh has said it wants market share to shift back to countries with the cheapest production.”

Meanwhile, we just learned that the country borrowed $4 billion over the past year to help cover its growing budget deficit. Saudi Arabia has set OPEC on a collision course with American shale, but it isn’t clear who’s going to blink first in this game of chicken. The fracking industry is finding new ways to cut costs and stay profitable even at today’s bargain prices. Meanwhile, OPEC member states are running deep into the red as they struggle to adjust to the bear market. For the U.S., the oil price decline challenged the industry to trim the fat and innovate anew; for the world’s petrostates, that plunge is threatening the finances of ruling regimes.

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  • Proud Skeptic

    Wow! This is exciting. I can remember sitting in gas lines back in the 70’s. Nothing is forever!

  • Jacksonian_Libertarian

    I like it, modern civilization is built on energy replacing muscle power. When the cost of that energy goes down, everyone is richer. Well, at least those not dependent on the price of energy, which is almost everyone. As I have said many times, it is the “Feedback of Competition” which forces continuous improvements in Quality, Service, and Price in free markets. So I sincerely hope OPEC will keep trying to compete, as mankind will be the primary beneficiary.

  • Pete

    What is SA thinking? The U.S. shale operators are diverse and many. They can shutdown wells that are not cost effective only to quickly open many of them back up again if and when the price of oil/gas rebounds.

    If SA’s strategy is to defeat U.S. fracking and not something else, it is a war they can’t win.

    • Andrew Allison

      The question is, what is TAI thinking. As I’ve written before, there is precisely zero evidence that US shale producers are the target. The Saudis have made it clear that their objective is to maintain their share of the OPEC market. The TAI thesis rest on the ridiculous proposition that the Saudis are too stupid to grasp what you point out.

      • fastrackn1

        I agree with you on this.
        I can’t imagine that SA with all it’s money and power, doesn’t have many operatives here, even working in our oil fields and oil industry, sending continuous info back to them to keep them updated on exactly what is going on here in our fields, and our oil industry as a whole. I doubt they are that inept.

        Just because something is written in TAI, that doesn’t make it so….

        • Andrew Allison

          Well yes, but when it keeps repeating something which is clearly nonsense . . . .

          • fastrackn1

            I also wish they would stop writing about the driverless car revolution that is ‘supposedly’ just around the corner.

          • Andrew Allison

            Not to mention telecommuting [grin]

          • Kevin

            The Saudi motives don’t have to be either or. With growth slowing in China projected demand has not materialized there. The Saudis wanted to maintain or expand market share to offset the drop in rev/unit. That doing so would hurt US shale producers and thus cut back on production was an attractive feature of thus approach. As woukd the fact that it would hurt their enemies in Iran. But no one of these motives was necessary – their motivation to do this was overdetermined.

      • CaliforniaStark

        Pretty obvious, isn’t it. Right now Saudi Arabia and Iran are at war; which is being fought largely through their proxies in Iraq, Syria, Lebanon and Yemen. In Yemen and Iraq, there is a direct involvement of the Saudi and Iranian armed forces respectively. Winning this war is paramount to the survival of the Saudi state. Keeping oil prices low hurts Iran; while Saudi Arabia can still make a profit. Am seeing continued American oil production actually being beneficial to Saudi Arabia’s war strategy.

  • rheddles

    Saudis Speed Up in Game of Chicken With US Shale Iran as rumors of nuclear agreement bloom like a thousand flowers.

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