Saudis Accept Lower Barrel Prices In Fight Against US Production

Cameron Aubernon
by Cameron Aubernon

While some OPEC nations are panicking over oil prices not being above $100/barrel, Saudi Arabia says it wouldn’t mind accepting barrels worth $90 or $80 for the next year or two, so long as it slows down production elsewhere.

Reuters reports the nation is playing the short-term, low-profit game for medium-term gains, with the long-term goal of retaining its market share for years to come in mind. The move would affect other OPEC members financially, forcing reductions throughout the industry.

In particular, lower barrel prices would put a dent in North American petroleum production, from the oil sands in Alberta and the Bakken Formation in North Dakota, to deep-sea reserves in the Gulf of Mexico.

Whatever cuts do occur, they would likely happen after the group’s meeting November 27, which may prove contentious as most members would rather raise the price than reduce production. That said, the Saudis have already cut prices for its Asian customers earlier this month, a sign of price wars to come.

Cameron Aubernon
Cameron Aubernon

Seattle-based writer, blogger, and photographer for many a publication. Born in Louisville. Raised in Kansas. Where I lay my head is home.

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  • Landcrusher Landcrusher on Oct 15, 2014

    The Saudis are rational players in a not so free market. What they are doing is one of the things that got Standard Oil broken up. Lower the price to drive new players out of the market and threaten any future ones to keep them out. The angle on this that you won't be hearing is that they will have the EXACT same response to any green energy competition that comes along. In fact, one result of this will likely be reduced investment in NG cars. OTOH, EV cars aren't really market driven now, so the result will only be reduced sales rather than reduced investment. Still, Mr. Musk can't be happy. Now. If we were going along with this it wouldn't be anti Russia. It would be domestic politics to hurt the administration's enemies and help the economy. All to shine up the terrible policies since 2007. We could respond by opening the shallow water off the Florida coast to development and totally crush a lot of our international enemies and juice our own economy while screwing the Saudis as well but that would be serious hardball for the JV boys in office right now. Also, lots of other consequences come with that. At any rate, if oil falls below about $75 they will be setting the stage for the next shortage and ability to make it back with double prices in about four years. They have to act fast though, because the next admin must get in office too late to respond responsibly. The good news is that this is the way the big dogs mostly fight nowadays. It's a lot easier on the young men and real estate.

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    • Landcrusher Landcrusher on Oct 16, 2014

      @Brad2971 Shallow offshore is actually much cheaper than the type of fracking used in most of the wells you are referring to. We forget this because we don't do it much anymore domestically. There is a very wide spectrum of costs of fracking due to different methods and for different offshore environments. Of course, if the new fusion thing turns out to be half as good as they claim this will all become moot in another fifty years. To the stars! Woohoo!

  • Bunkie Bunkie on Oct 15, 2014

    Re: my earlier comment. While I'm not sure what role the US is playing, I find it *entirely* believable that the Saudis are going for the jugular with respect to Iran. Between the existing sanctions and drop in prices, things in Iran are going to get very interesting. Especially since their proxies in the Shia vs. Sunni war are currently getting their asses kicked. That last point is where it gets weird. The US is supporting the Shias (Iran's proxies) and the Kurds against the radical Sunnis, yet is allied with the Saudis (whose proxies are connected to the radical Sunnis). I'd say that the word that begins with "cluster" and doesn't end with "bomb" really applies here.

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    • Highdesertcat Highdesertcat on Oct 15, 2014

      @Landcrusher LC, considering that both the Jews and Arabs descent from Father Abraham...... Is it any wonder that this feud has been going on for more than 6000 years?

  • TomLU86 TomLU86 on Oct 16, 2014

    Pch101 nailed it! America's newfound oil is hard to get, and costs a lot to extract. If it costs $80, at some point near $80, it stops flowing. Reduced supply then drives up price. So, I don't see this Saudi move as having staying power. However, it comes at a good time--just before our elections--and serves US/Saudi interests....for now.

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    • Pch101 Pch101 on Oct 18, 2014

      The breakeven costs for shale are thought to be somewhere in the range of $60/bbl. $80 won't be enough to deter production, although it's obviously far less profitable at these lower prices. If prices fall further to somewhere around $70, for example, then there will probably be less production and exploration, since the profits won't be high enough to justify much new investment. If prices fell to about $60 or so, then you'll see things slow down quite a bit. It certainly wouldn't be worth investing in new product at that point. At $60, the Saudis are still making money. Their production costs are far lower. I suspect KSA's motives are more about politics than economics. Cheaper oil is far more painful for Putin and Iran than western sanctions could ever be, and it could force Iran to negotiate seriously about nukes. It's a bloodless way to wage war on the both of them.

  • Bd2 Bd2 on Oct 17, 2014

    The price of oil is still high relative to supply/demand due to the immense amount of monies nowadays in oil futures. And the price of gas is still high relative to the price of oil due to US export of refined fuels and other means that US refineries use to keep prices higher.

    • Landcrusher Landcrusher on Oct 17, 2014

      Bd2, That's a pretty accusatory statement. May I ask what you do for money? I will then be happy to write a similar accusation of the crazy conspiracies you are part of to bilk all of us honest people out of our fairly earned dollars. :)