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Crude Economics
Saudis Are the Oil Market’s Biggest Losers

The last few years have been difficult for anyone in the business of selling oil, as prices tumbled from over $110 per barrel to a nadir of just $27, before rebounding to the middle ground they reside in today, at roughly $50 per barrel. Bargain crude has forced state producers like Russia or OPEC’s members to cut budgets in an attempt to stop the bleeding, and it’s forced many private firms—especially those operating in relatively high areas like shale—out of business.

But no supplier has been harder hit by the collapse of oil prices than Saudi Arabia. Riyadh has had to dip into its sovereign wealth fund to help cover the budget deficit bargain crude has brought about, and it’s also had to do the heavy lifting for the production cut plan OPEC and 11 other petrostates agreed to adhere to during the first six months of this year. That combination—lower production and lower prices—has been nothing less than vicious to the Saudis. The WSJ reports:

As it pursues a steep production cut aimed at putting a floor under oil prices, the world’s biggest crude exporter is conceding ground to American shale producers and hastening a retreat from the U.S., people familiar with current Saudi policy said. […]

Saudi Arabia is falling behind Russia when it comes to supplying China, China’s General Administration of Customs data shows. China is one of the world’s fastest-growing major oil consumers…Elsewhere, the Saudi oil machine has been outmaneuvered by Iran and Iraq among big European customers in France, Spain and Italy, according to data from the International Energy Agency.

Perhaps it’s not surprising that Riyadh would be the one most unduly affected by cheap crude. After all, the Saudis are and will remain for the foreseeable future the world’s biggest oil power. But the kingdom’s decision to agree to production cuts—and to shoulder the heaviest burden of those cuts, as well—is having something of a self defeating effect. As prices rise, so too do the prospects of struggling shale producers, which means that the Saudis are effectively giving valuable market share to their American competitors.

That would be a bitter pill to swallow under any circumstances, but when you consider the fact that Saudi Arabia is doing this by choice, well…to say it must be galling would be an understatement.

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  • D4x

    Wait for Libya oil supply to come back, under Russia’s ‘protection’.

  • Andrew Allison

    Stuff-and-nonsense.

    Fiscal break-even price, Fiscal deficit (% GDP)
    Algeria $96.10 -13.90%
    Angola $110.00 -3.50%
    Ecuador n/a -5.10%
    Iran $87.20 -2.90%
    Iraq $81.00 -23.10%
    Kuwait $49.10 1.20%
    Libya $269.00 -79.10%
    Nigeria $122.70 -2.80%
    Qatar $55.50 4.50%
    Saudi Arabia $105.60 -21.60%
    UAE $72.60 -5.50%
    Venezuela $117.50 -24.40%
    (http://www.cnbc.com/2015/12/03/oil-prices-and-budgetsthe-opec-countries-most-at-risk.html)

  • Charles Martel

    While the Saudis are caught between a rock and a hard place, their current strategy may be the right one. It may be that they continue to cede market share to the US for a little while longer, but they judge that production from accessible North American fracking will fairly soon reach a plateau under current prices. There’s little the Saudis can do about it, since if they lower prices now to keep market share, they will lose market share later when prices rise.

    • mikekelley10

      One possible game-changer is that the US now has a President who wants us to have affordable energy. This is a huge change from Obama’s war on coal and refusal to allow drilling on federal lands.

  • Jacksonian_Libertarian

    2 years ago Saudi Arabia’s sovereign wealth fund had $700+ Billion. It now has $500 Billion, so they will go broke in a few more years. LOL, I love seeing OPEC suffer, as I have suffered every time I buy gas, or pay a power bill.

    Cartels are illegal in America for a reason, monopolies even limited ones, sacrifice the benefits of a free market.

  • Del_Varner

    Maybe this will reduce or eliminate their funding for wahabbi/salafist imams in the world.

  • Conventional fields are also being discovered as the one in Alaska that would keep the Al-Can pipeline functional indefinitely. It may well be that the Carter Administration will be vindicated in the fullness of time, having brought us the pipeline, cruise missiles, stealth and a few other goodies.

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