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:
- 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.
- 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.