My understanding of part of why gas prices are going down is Saudi Arabia wants to drive down oil prices in the hopes it will bankrupt the shale oil industry in the US & Canada, which I think need oil to be at $60 a barrel or higher to be profitable. So Saudi Arabia drives down the price, those businesses fail, and then OPEC (probably) cut production and prices go up again. And this time the shale industry is gone and can’t provide oil to the market.
If SA succeeds in this venture, and oil prices rebound and jump up to $100 a barrel again will the shale industry rebound? Shouldn’t all the infrastructure still be there just waiting to be reused once it is profitable again?
There’s no single price that determines the profitability of North American oil. Rather, it’s probabilities: 75% of oil production is profitable at $70 a barrel, 50% at $60 a barrel, and so on (sample numbers). More importantly, however, is that there are a lot of sunk costs involved in oil production, and so oil companies will still operate most of their wells even at a loss to minimize losses.
However, I’ve heard that the main target of SA’s actions is not the US, but Iran.
Speaking of targets, is there no resource or place to complain for Russia or even the USA to report about what amounts to dumping? Not that l disagree with making Russia unconfortable, but for less than that big companies get governments to order trade sanctions as the usual answer.
Saudi Arabia would bankrupt itself long before a lower price of oil will impact the new extraction industries.
Saudi Arabia as a country has only one real product available to sustain itself, crude oil. This is the real reason that they have refused to curtail production, they need to keep moving oil regardless of the market price. It is the only income flow they have. They simply can not stop.
Their continued high production levels have little to do with North American production. To withhold their oil until the market price rises deprives them of income flow that they can’t do with out.
OPEC not artificially limiting demand will do nothing to the broader shale industry of long term consequence, to try and put it as quickly and succinctly as possible:
[ul]
[li]Wells already drilled are still marginally worth pumping almost to $0, every potential barrel or cubic foot of gas not pumped just means less of the sunk costs recouped. The only time they’d choose not to pump is if they felt they could essentially operate as a storage company for a bit, holding un-pumped oil/gas in the expectation of getting more out of it later. Depending on their debt structure though many players will be required to pump until the wells run dry.[/li][li]Marginal shale players that are heavily investing off of debt they’ve taken out could be driven out of business. But this isn’t the same as the shale industry disappearing.[/li][li]Unlike many traditional large projects, the typical shale well is a small project that can see production within a week, this means drilling can resume very quickly in response to changes in market conditions when drillers decide to drill less in marginal areas[/li][li]There are very large players who could shut down 100% of their shale business and still be massively profitable, they aren’t going anywhere. In fact the marginal players who do go out of business will likely see much of their drilling rights bought up by these big players, who will happily wait and start drilling whenever they please. For the marginal players deeply in debt they cannot easily stop drilling because they have debts to pay, and the wells they already have flowing they’ve usually sold off the profits to some MLP or other vehicle. But the large players can afford to buy up drilling rights and hold them for years.[/li][/ul]
Of course it will rebound. It will follow the historical pattern of all extraction of natural resources. If you can make money by producing gold, tin, oil, whatever, you extract it. If you can’t, you don’t, and you wait for the price to make it profitable again.
Prices of natural resources are cyclical, and so is production. This is not new.
The Saudis? I doubt they’d be allowed to buy up all the assets of bankrupt marginal players, they’ll go to the likes of Exxon or etc. The U.S. government gets to review large acquisitions by foreign governments when it believes (and it has broad discretion) the industry has national importance. They’ve done so when China purchased a large pork produced (they let the sale go through), and they’ve blocked Chinese purchases of network equipment manufacturers in the past for fear it’d give the Chinese government the ability to put secret back doors in U.S. networking infrastructure.
You can go to the WTO about dumping, but OPEC isn’t dumping. OPEC is a cartel that artificially lowers supply by choosing to pump less oil, as a collective, in order to keep oil prices high. Choosing to not do that, is not the same as dumping. The oil futures prices had ‘baked in’ the assumption that OPEC was going to slash production to maintain a price floor. OPEC didn’t, so the traders immediately readjusted back down (through free market mechanics) and that ended up being a good chunk off of per barrel oil prices.
Saudi Arabia still makes money off of every barrel it produces, it isn’t specifically selling barrels for “less than market rate”, it’s still getting as much as it can while remaining competitive. Dumping is really when a country sells below its cost of production to wreck another country’s industry in that good/commodity, or selling something for far less in another country than in its home market. Saudi Arabia isn’t doing that, they’re selling as best as they can with a nod toward long term contracts, maximizing profit, and making sure they remain competitive. That causes a natural decrease in prices, it was the higher oil price that was “unnatural” as of late, because it was based on expected cartel actions (cartels are illegal in most countries, of course OPEC is outside the bounds of those laws, but cartels are illegal because they are a form of organized collusion that erodes / disrupts free market forces for the benefit of cartel members and the detriment of the rest of the economy.)
I knew about a lot of you report here, but the point I was referring was that articles I saw reported that SA is losing money.
The point of the article is that SA is now doing the unnatural thing, but in reverse. Using their reserves to allow them sell at a loss for them so as to affect their enemies. And it looks like dumping to me, but I have to remark again that SA’s targets are also (mostly) ours nowadays.
I was just pedantic, IMHO it looks like dumping since the business article reports that SA is losing money (it can be debated that they didn’t have a normal home market, but the fact is that they are losing money now), but for practical reasons I expect any complains from Russia, Iran and even some local shale oil companies to go nowhere for current political reasons anyhow.
The article appears to state that Saudi Arabia is going to have a deficit due to increased national spending in 2015, not that the country is losing money in oil production. Saudi Arabia spends very little money producing oil:
Edit: I should mention this is a response to GiGObuster’s post.
I will grant you that point, however, I was referring to the overall impact on SA. And as the articles report what SA is doing is still unnatural, but going the other way, if this was the way the market was supposed to work then this talk of reserves and money saved that allows them to make a squeeze move makes no sense, it is clear why SA is making this move and as the article quoted reports:
I have to say that I’m a bit on the pessimist side. But we’ll see.
I don’t see how Saudi Arabia deciding to not cut back production is “unnatural.” Countries, like businesses, make strategic decisions all the time to benefit themselves. Saudi Arabia is still making a profit from oil production, albeit less profit than it was previously due to falling global demand. If it were dumping oil by selling it below cost of production, I’d see a case for other countries to complain. But that’s not what it is doing here.
Let’s see this another way: do you think we would be better off if Saudi Arabia cuts production so that we see a rise in oil prices?
Why? If fracking or any other novel oil extraction method can survive only because of historically inflated oil prices, then those methods rationally should become uneconomical when oil prices taper off due to decreased demand. I won’t speak to any potential geopolitical repercussions in the quoted text, as it’s based on pure speculation.
Yes, because I approach this from the environmental side of things too. The target of SA is also the alternate energy sources that are gaining ground around the world.
Not talking about defending the frackers here, but worried about what cornered regimes can do to world peace.