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Crude Economics
Saudi Minister Admits Petrostates “Watering” Shale’s “Green Shoots”

After spending most of 2016 talking about cutting production, OPEC—along with a collection of 11 non-member petrostates—finally managed to cobble together an agreement to help reduce the global glut of crude last November. Those cuts started in January, and thus far they’ve been marginally successful, having pushed oil prices up about $10 to $55 per barrel. That’s welcome news for the petrostates responsible for reducing global supplies, but a rising tide lifts all boats, and these higher prices have been especially helpful for cash-strapped American shale companies. As the FT reports, the Saudi energy minister just admitted as much at the CERAweek energy conference in Houston, Texas:

[Saudi Arabia’s energy minister Khalid al-Falih] said the cuts were taking effect more slowly than he expected and added the agreement was helping sow “green shoots” in the industry, mainly in the US. As oil prices have increased, US producers have deployed more drilling rigs, threatening a rebound in supplies unbound by the output pact.

He acknowledged that Saudi Arabia had a hand in “watering of the green shoots,” and welcomed the return of investment in US shale. […]

The comments of Khalid al-Falih at the CERAWeek by IHS Markit conference stood in stark contrast to those of his predecessor at the same venue a year ago. Then, minister Ali al-Naimi bluntly warned shale producers they must trim their costs or risk bankruptcy.

In one simple statement, a top Saudi official is confirming two uncomfortable truths for petrostates in 2017: first, that these cuts have had something of a sluggish and lackluster effect; and second, that American shale producers are direct beneficiaries of this market intervention.

OPEC and its ilk may be heading towards something of a worst-case scenario with these cuts. There’s still enough oil sloshing around out there to prevent crude prices from climbing back above $100 per barrel anytime soon, barring some major supply disruption or world event. Much of the oil these petrostates are taking out of the market is being offset by an increase in American output. That phenomenon is already visible, as the U.S. is once again producing more than 9 million barrels per day (bpd) for the first time in nearly a year. Thanks in large part to rising crude prices, American production has climbed more than 500,000 bpd since October.

This is the Catch-22 petrostates now face: if they cut production, they cede valuable market share to their American rivals, and, to borrow the words of the Saudi minister, the more they cut, the more they “water the green shoots” of the U.S. shale boom.

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  • KremlinKryptonite

    It’s the same problem farmers have today. When times are good you invest your money into more land, but when times are hard, like right now, that extra land adds to the glut.
    You bought that farmland to do one thing and one thing only, so even when prices fall you just keep producing.
    It boils down to efficiencies, so you’ll have to become profitable through new techniques and innovation.

  • Jacksonian_Libertarian

    Government Monopoly owned Oil Monopolies vs. the American Free Market. That’s no contest!

  • ljgude

    After all the Saudi financing of Wahhabi Middle East Studies Departments, radical Mosques in the US and Europe, and madrassas teaching radical Islam across the Sunni Islamic world I come down hard on the side of the frackers. They may or may not be doing significant environmental damage but in slowly squeezing the Saudi’s they are doing the Lord’s work. 😉

    • Ellen

      And it is about time too. The Saudi King is now traipsing around Asia looking for suckers to invest in the Saudi non-oil economy that they are desperately trying to build after 70 years of a one-crop rentier state. It’s a bit late for that. No sane businessman would invest a penny in any Saudi company that requires half the workers to be lazy Saudis and gives the government control over things that are usually left exclusively to the private sector. This year will be the year when everyone realizes that Saudi royal family is doomed and so is the country.

      • ljgude

        Indeed I noticed that Asian trip too, but I would caution, as an experienced Mugabe watcher, that doom is sometimes an elusive quantity. I don’t think they will go voluntarily and the possible scenarios are manifold. al Qaeda and Desh are both Wahhabi sects more extreme than the Saudi royal family and even perhaps much of the population. Yet they have established world wide networks and may find themselves, even in defeat in Syria and Iraq, ready to try to directly topple the House of Saud. What do you think would happen the Royal family fell?

        • Ellen

          I know that people have predicting the demise of the Al-Saud ever since the 1980’s crash in the price of oil. However, conditions are different now, and in the era of the Arab Revolts and social media, Saudi youth are not going to be so easily bribed or terrorized by a geriatric and decadent clan. No one has any idea what will happen when (not if) they fall. The first question is how much of a fight will they put up? Will they flee immediately, as did Ben Ali in Tunisia, or will they make an attempt to survive by killing their own people. I think they will flee quickly, which then leads to the question, who will take over? My hunch is that no one will be able to hold the Kingdom together after them, and it will break up into lots of pieces, largely by tribal regions plus the Shiite area along the Gulf coast which contains most of the oil. Iran will make a play for that, with its usual Shiite proxies, and that is where American intervention may become necessary. Will Trump intervene, though?

          The Sauds will flee to Morocco, I think, where they have already built an entire city large enough to hold 50,000 people (royal family plus servants). They will spend their remaining days in that region of the world plus Europe, floating around their usual hangouts.

  • Proud Skeptic

    Speaking as one who waited in gas lines in the early 70’s…I relish this.

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