OPEC General Secretary: “Whether it goes down to $20, $40, $50, $60, it is irrelevant,” he said.
What’s in it for them, to tolerate such falling prices? If they get North American fields to stop producing so much, won’t those fields just come back online if the price then rises again? Won’t they make more money in the long run if they throttle down and get more per barrel over the lifetime of their oilfields?
They’re also competing for market share. They have more financial reserves and so are better positioned to survive this price war, they’re betting others will blink first and agree to producing a lower percentage of the worlds output.
I read somewhere that Saudi Arabia wants to make sure it maintains its market share, which doesn’t make a lot of sense to me since people don’t care where their gasoline/heating oil comes from. Whether SA has a 20% or 60% market share seems irrelevant from a consumers perspective anyway.
Iran and Russia. Iran is a regional rival that tries to throw its weight around in the region (trying to influence Iraq, for example). Iran is Shiite and Saudis are Sunni. There’s a basic rivalry there.
Plus, Iran is helping Assad in Syria; Assad is Alawite, which IIRC is a subset of Shiite. Syria like Iraq is a mix of Sunni and Shiite. Russia is helping Assad. The Saudis are funding many of the Syrian rebel groups.
Of course, the Russians are hurting all over too from low oil prices - which the USA likes; so the USA probably likes what the Saudis are doing to Russia - brownie points for the Saudis in Washington. The American politicians get more brownie points from the voters for low gas prices, that’s more important than support from oil frackers. As far as the Americans are concerned, their shale oil will still be there when the price goes back up.
yes, the Saudis are in a deficit position; but they obviously care more about sticking it to their enemies, they seem to feel they can make up the deficit later.
No one thinks the consumers care about who has what market share, and that’s not what the market share argument is about.
The issue is that OPEC only produces about 40% of the world’s oil and the US and other non-OPEC producers can keep on increasing their production without regard for whatever OPEC decides. So OPEC’s ability to control price by limiting their own production is limited. Suppose OPEC cuts production by 10% for all members. Then increasing US production can make up the slack and push the price back down to where it was before the OPEC cuts, and now OPEC is getting the same lower price for their oil but selling less of it. Conversely, if OPEC doesn’t cut production, then this puts more pressure on US companies to cut their production (since they have a higher cost of production) - as is already beginning to happen - and then the price goes back up with OPEC now selling a bigger share of it.
This is not to say that SA doesn’t also have geopolitical considerations, as others have suggested. But from a purely economic standpoint it can also make sense for them to take some short term pain in order to ensure that they keep market share. So my guess is that they’re reluctant to absorb all the lower production and let others gain market share at their expense, and feel they can wait it out and see where the price settles without them moving their production quotas - they expect others outside OPEC will lower their own production and push prices back up, but if it doesn’t happen they can reassess at that point.
When oil tanked in the early 80s, Saudi Arabia did cut production. And did themselves no good. The other OPEC members didn’t cut production and gained market share. The price of oil wasn’t affected by their actions.
These days, the Saudis don’t even have as much market share. The US is producing too much for that.
So, they can get what they can or they can turn down money. There’s no real way they can push prices back up. There’s too much supply they don’t control. It’s an urban myth that they can set prices as they will.
OPEC collectively might be able to effect a small change (though even that is unlikely) but OPEC has never been able to prevent every single one of its members from cheating.
I think that the Saudis were very impressed by the Russian invasion and takeover of the Crimea and Eastern Ukraine and figured that the only huge loser in dumping on the market at this time would be Russia. Russia is really going to start hurting unless prices go up. Saudi Arabia, by itself, can keep prices where they are and send them down further. They probably sent Bandar Bush to secure Republican support and are taking Obama “we will defend the Ukraine” at his word.
The statistics on this page from the US government’s Energy Information Administration are that in 2007-2009, the total cost (lifting costs plus finding costs) of a barrel of crude oil produced on-shore in the US was $33.76. For the Middle East as a whole, it was $16.88 per barrel. So if oil drops as low as twenty bucks a barrel, it will be unprofitable for most US production but not for the Middle Eastern countries.
And don’t forget shale oil. It’s more expensive than conventional oil. For shale oil you can add another 20 or so bucks a barrel to the extraction cost. At a low enough price you can shut down exploration and drilling in the shale oil regions. Of course, that oil won’t go away, it just sits in the ground until it becomes economically feasible to extract it, but that could be years from now.
Sorry for the semi-hijack but how much do just the barrels cost? What’s the going rate for a barrel? For as low as these oil prices are dropping, it’s got me wondering which product will be worth more? The oil or the barrel holding it all?
Some very misleading analysis above imo. Firstly, we are only a few short weeks/months into this major oil price drop. Oil has fallen for the best part of a year now, but only in the last few weeks has it fallen to significant lows. The consequences of these lows have barely been felt yet.
If this is a move to hurt Russia then its misleading to overly personalise it. Hurting Russia is not the same as hurting Putin. Sure, there may be significant overlaps, but I doubt SA are doing all this just to hit Putin’s short term polling numbers.