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Crude Economics
Are Petrostates Happy With Oil Prices?

Oil producers around the world are always attentive to the fluctuations of crude prices, but they’ve been paying special attention this year to see how far the petrostate production cut is going to inflate those benchmarks. Brent crude—the stand-in for European oil prices—is up roughly $10 per barrel since the cuts were announced, and that is, apparently, a “very comfortable” price level for the Qataris. Bloomberg reports:

“Given where we see the oil prices today, I think we are somewhere close to break-even,” [Qatari finance minister Ali Al Emadi said Tuesday]…Spurred by lower revenue from energy exports and overlapping bureaucracy in places, Qatar has merged ministries and canceled or delayed some projects over the past two years. This helped to curb operating costs while the government continues a spending plan that will peak by 2019, Al Emadi said.

The oil-soaked Gulf country has worked to curb government spending in order to avoid the sort of out-of-control fiscal deficits that many major crude producing regimes have been faced with following the collapse in crude prices two and a half years ago.

That’s all well and good for Qatar, but what about all those other petrostates struggling to stay in—and keep pumping—the black? According to the IMF, only Kuwait and Iran have fiscal breakeven prices (the bare minimum price per barrel needed for a supplier to balance its fiscal budget) below the Brent benchmark, which today is trading just above $55 per barrel. To avoid running a deficit, Algeria would need oil to trade above $85 per barrel, the Saudis need $70, Bahrain requires $93, and Libya won’t zero out its fiscal balance until crude hits $149 per barrel. Qatar, in other words, are the only petrostate that can reasonably be content with the status quo.

But there remains a large problem for all of those other countries, both inside and out of OPEC, which still need crude to climb further: American suppliers. As these petrostates have reduced their own output to help give prices a boost, they’ve also bumped prices up for their U.S. competitors, and as a result we’ve already seen a major uptick in American crude production. Since early October, U.S. output has climbed more than 500,000 barrels per day, in large part thanks to rising prices making more shale plays profitable once again.

$50+ crude has been enough to help out American frackers, but there’s another group of U.S. suppliers waiting in the wings, should prices continue to rise: offshore drillers. This group has thus far not enjoyed the full impact of the American oil rebound, but if the West Texas Intermediate (WTI) benchmark—what we use to look at the price of oil here in the U.S.—should creep past $60 per barrel, these marine producers will get to join the party.

This American oil resurgence is diluting the effect of the petrostate cut by continuing to support the crude glut that led to the price collapse in the first place. Shale is on the rebound in 2017, and offshore producers aren’t far behind. So with that, a word of caution for all of those petrostates not named Qatar that might be hoping that their production cut will send prices higher: be careful what you wish for.

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  • Jacksonian_Libertarian

    This isn’t going to end well for OPEC, as Fracking technology continues to become more efficient, the breakeven point will drop. What happens when Trump releases all Public Lands for Fracking development, he’s already authorized pipeline projects the leftists were blocking? I don’t see offshore drillers making a comeback unless they can cut costs faster than the Frackers.

  • Unelected Leader

    They can’t possibly be happy with the prices or with America’s technology-driven energy revolution.
    Although, the Kremlin and Mid-East petrol states will back up American communists who protest new pipelines and development of the energy sector to at least slow it down.
    They do this with money and favorable coverage from their state propaganda RT, Aljazeera, etc.

    • Suzy Dixon

      Absolutely. And you know the saying. They’re just like a watermelon. Green on the outside, but red on the inside.

    • Jim__L

      I wish their state propaganda didn’t include CNN and NPR…

      • Andrew Allison

        What’s particularly galling about NPR is that the taxpayers are paying for this relentless propaganda.

        • Jim__L

          And it’s not even particularly accurate or well-researched, as I’m sure you’ve heard me talk about…

  • Disappeared4x

    OPEC must also know Jordan wants to develop their consider oil shale resources, for import replacement, and national security.

    I only follow oil shale in Jordan and Israel, where the est. reserves are huge, but climate change activists seemed to have stopped it, in court.

  • Kevin

    What is Russia’s break even? Given their enormous output and influence on other producers’ thinking that’s more worth knowing than some of these much smaller states which are effectively price takers.

    I think there is too much micro-bottom up analysis of oil prices (which misses many important but unknowable factors) and too little historical analysis of boom and bust cycles in oil and other extractive industries which would add some needed humility to boom forever or bust forever forecasts basset on extrapolating the most recent trends.

  • Andrew Allison

    Repeat after me, the U.S is the swing produce which determines world oil prices

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