Why does Saudi Arabia want to keep pumping so much oil?

I think GaryT’s answer is the most logical. Saudi Arabia has like $600bn in foreign currency reserves, they also have the cheapest oil in the world. Historically Saudi Arabia has been willing to do stuff in line with broader OPEC desires for political influence reasons and because they largely felt it was to Saudi Arabia’s benefit to keep OPEC robust.

What this more recent decision really says is that OPEC as we know it isn’t really alive any longer. Saudi Arabia is saying it’s going to use its oil production solely in its interests, and eschew any broader cartel concerns. I suspect targeting Iran, a country Saudi Arabia spends tens of billions of dollars in fighting a proxy war against throughout the Middle East, is its chief concern. Market share is a good thing to claim if you want to deny targeting Iran, but Saudi Arabia is pretty good at ramping down and ramping up production, there’s not a realistic reason they’d “permanently” lose market share by a temporary production reduction. Since they have the lowest price oil they’re always going to be able to muscle a large amount of market share for themselves.

OPEC member Venezuela is left out in the rain, but Saudi Arabia doesn’t much seem to care. Russia isn’t in OPEC but is likewise an ancillary casualty, I do think the prime target is Iran.

The reason I do not believe the real target is American producers is two fold:

  1. A fracking operation takes one week to startup. Literally. That’s how long it takes to drill and start extracting oil and gas from it for one well. There is a huge store of trained drillers and well workers that aren’t going to die anytime soon. What fracking has done is made the oil market much more elastic.

Saudi Arabia can push out some marginal producers in the United States, and can stop the rate of new well drillings. This will reduce the growth in American production (already happened), and perhaps even reduce production if they continue to do so for long enough. As you say though, when prices go up, the drilling starts again, very very rapidly.

In the past this was not true, major drill jobs took years and years to come on line. Read about some of the conventional plays the oil majors are working in the Arctic, parts of Central Asia or etc, some of them have cost billions of dollars to get started and taken a decade of work. But it is true now.

  1. Saudi Arabia would have to be ignorant of everything I just said for them to think this could somehow “defeat fracking.” Saudi Arabia, whose entire country is funded off of oil, would have to be ignorant of the very basics of the oil and gas industry in the United States, one of the most open countries in the world and in which anyone with a web browser can learn all about said industry.

No, Saudi Arabia knows it could only push out marginal producers, and that if prices went back up, new producers would spring into being very rapidly. What makes a lot more sense is they’re targeting a country that largely is tied up in traditional oil plays, cannot easily scale up or down, and whose country gets hurt really bad below the $70-80 per barrel level. That country is Iran. Russia is also hurt by it, but Saudi Arabia likely isn’t targeting Russia directly.

Of course OPEC itself and Saudi Arabia aren’t as big a share of global production these days. So to some degree even Saudi Arabia’s ability to control global production is limited, even through OPEC. While it may seem Saudi Arabia / OPEC single handedly dropped the price of oil, it is a little more complex than that. Part of oil’s stubbornly high price was a “baked in” evaluation by marketers that OPEC was going to slash production at some point, so people were valuing oil barrels higher in the expectation they would become more scarce due to an artificial (cartel controlled) production decline. When it became apparent that wouldn’t happen, all that really happened is oil floated more to where its price should have been, essentially when a looming uncertainty was resolved in a given way, the market price became more rational than it was before.

But that’s not really a realistic scenario. The Middle East simply cannot produce enough oil to satisfy global demand. So oil could never drop to $20/barrel. In some fantasy scenario where all non-ME oil wells were turned off, then all the countries of the world outside the ME would be in a bidding war for the scarce oil, and its price would be very high.

The same forces that make that true also make it impossible for price to fall anywhere close to low enough to push all Western production out of business, the West produces such a large share of the world’s oil the global market simply cannot provide enough oil to undercut the West for the actual prices to fall so low that Western production as a whole is unprofitable.

If Saudi Arabia is targeting Iran, why now? I don’t really understand the timing.

Because it’s ad a sustained high-price period in which to build foreign exchange reserves.

The North American oil boom is to some degree a secondary effect of the more primary goal - developing the natural gas resources.

Natural gas production reached 2.6 tcf/month in 2011 and has held there while reliable demand catches up with supply. Demand of course does grow, as coal plants are retired or retrofitted in favor of gas. While waiting for that demand to grow production pivoted into oil, with wells that are much shorter lived.

In any case the short to moderate term for SA is that decreasing production will not increase their profits when now large players won’t play as part of your cartel and that they are better off letting good old fashioned market forces play out. The price that supply/demand will settle on will be more profitable for them than for the tight oil producers.

If that hurts foes all the better, if it hurts friends, oh well. Bye Venezuela.

No one really should want a completely destabilized Russia, including SA. One taken down a peg and hurting some, sure. If they have to go into their cash reserves quite a bit and bail out their private sector some … fine. But don’t poke the bear too hard with the stick.

This really is all about what makes good business sense.

In a perfectly competitive market every producer must just take the price the market gives, or not produce and not take it, but with no expectation that their actions alone with have any effect on the price.

For a small scale producer in the non-OPEC world this is how it actually works. For Saudi Arabia this hasn’t been the way it works, but one thing that may have changed is that it’s become more like the way it works even for Saudi Arabia. They may have simply concluded that any production reduction they could stomach in terms of reduced total revenue would not drive the price up very much, or support it anywhere near $100; and they may have given up on any likelihood of real solidarity within OPEC. Even in the past the conventional wisdom is that everybody cheated on lowered production quota’s except SA anyway.

Economic warfare against Iran might be a secondary motive. It’s hard to imagine OTOH SA really cares a lot about hurting Putin or Russia if it costs SA anything. And I don’t think the rift between SA and the Obama admin is a hoax but real, and less reason to believe there’s a secret deal for SA to hurt Russia on the US’s behalf. Why should SA trust Obama to do anything for them (against Iran say)? And again SA just doesn’t have a very strong direct motive to wage economic warfare on Russia.

The favorite Western media explanation of SA action v US shale producers is also pretty questionable IMO for reasons other have given. It’s a particularly resilient form of production because of the short lead times involved. And the cost is a moving target as the technology continues to improve. The lower oil price does though also inhibit big, expensive long lead time oil projects of other kinds (deep offshore, arctic) in a variety of countries, not just the US or Russia.

Many people think that a primary reason that the Saudis are not cutting production is to undercut the burgeoning U.S. energy market. They believe that the upstart companies cannot compete right now if prices fall too low, so they’re taking the chance of keeping production up and dropping their prices. That could knock a number of new US producers out of the game. Right now, the US presents a major threat and they’re not about to lose the edge they have.

To satisfy its ungrateful pimp

A barrel is just a unit of measurement. Oil is not actually transported in barrels to any meaningful degree.

When I worked at a factory, we had at least one 55 gallon drum of motor oil delivered every week.

That doesn’t contradict what LonghornDave said, especially as he was referring to crude oil, which is transported in much larger quantities than “at least one 55 gallon drum every week.”

Also, a barrel of oil is 42 gallons.

Much of what is being said is done for political purposes. There likely will be a curtailment in Saudi/OPEC production ultimately. Clearly the Saudis do not want to be the sole swing producer. OPEC sets quotas and then everyone but the Saudis cheat on them. Further, why should the Saudis bear the entire burden and let other OPEC countries and non-OPEC countries benefit.

My guess is that a cut will happen. It will include non-OPEC countries such as Russia. It will not occur until February at the earliest and June at the latest.