A confluence of causes dropped the price of oil over this past year, but the crash can be boiled down to supply outstripping demand. In years past OPEC has cut its own production in order to buoy falling prices, but Saudi Arabia is leading the petrostate cartel in a very different direction this time around, instead choosing to pump more oil in an attempt to squeeze upstart non-OPEC producers for market share. In March, Riyadh produced more crude than it has at any point since November 2005, as Bloomberg reports:
Saudi Arabia and Iraq boosted exports as the Organization of Petroleum Exporting Countries pumped above its official target for the 11th consecutive month in April, data compiled by Bloomberg show. Middle Eastern producers are competing with cargoes from Latin America, North Africa and Russia for sales in Asia, and competition has intensified since OPEC decided on Nov. 27 to keep its output target unchanged at 30 million barrels a day. The group is to meet next on June 5 in Vienna. […]
Iraq, the largest producer in OPEC after Saudi Arabia, shipped 2.98 million barrels a day in March, the most since at least January 2007 when it began submitting data to the initiative known as JODI.
Of course this is contributing to an already oversupplied market, and it’s one reason why we’re unlikely to see prices climbing back above $100 per barrel anytime soon. Another reason: Iranian output looks set for a boost of its own as the advent of Western sanctions being lifted approaches as part of the framework nuclear deal.
But Riyadh, like most of the world’s petrostates, is hemorrhaging money at crude’s current prices. Countries like Saudi Arabia, Venezuela, Algeria, and even Russia grew accustomed to consistently high oil prices over the past decade (the 2008 financial crisis period notwithstanding), and many governments in the Middle East expanded government spending as a way to stabilize regimes during the Arab spring. Now that prices are dropping, those regimes are facing a difficult choice between cutting output to boost prices or cutting spending to balance their budgets.
Saudi Arabia seems content to rely on its sizable sovereign wealth fund as it runs in the red for the time being, but that’s not a long-term solution. There seems to have been an expectation that a bearish crude market would squeeze out U.S. shale producers, but the industry is finding new ways to cut costs and continue operating even under today’s much smaller margins.
So for now, the world’s producers all seem intent on pumping out more oil than the market demands. That’s good for buyers, but eventually something has got to give on the supply side. Who’s going to back down first in this game of chicken?