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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