By on October 15, 2014

Rock the Casbah

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.

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56 Comments on “Saudis Accept Lower Barrel Prices In Fight Against US Production...”


  • avatar
    redav

    So, domestic production is lowering global prices? (Well, not necessarily yet–we’ll see if the rest of OPEC goes along.) I expected increased US production to stabilize prices (which it has considering the problems in the mid-east and the lack of oil price spikes that result from them); however, I didn’t think OPEC would try a cheap oil strategy again.

  • avatar
    VoGo

    Oil below $90/barrel means Russian recession. The Circus of Putin rolls on.

    • 0 avatar
      bunkie

      There’s an op-ed piece in the NY Times today that makes the case that both the US and Saudi Arabia are trying to break the backs of both Russia and Iran.

      Furthermore, there is a historical parallel in that a similar price war instigated by the Saudis back in the mid-80’s was a major factor in the collapse of the Soviet Union due to their loss of $20B in annual hard-currency income.

      I’m not sure I buy it, but it is an intriguing notion.

      • 0 avatar
        spreadsheet monkey

        Read a similar story in the Financial Times here in England. Interesting, if it’s true.

      • 0 avatar
        highdesertcat

        More than a notion, but also a means to and end.

        Once the goal is achieved, whatever that goal may or may not have been, the price of oil will be jacked up once again (for the profits and the tax revenues).

        And Americans will pay no matter what gasoline and diesel costs at the pump, even though it has been proven time and again that oil does not have to cost as much as it goes for on the markets. It’s all about the profits! It’s all about M-O-N-E-Y!

        I admit that I, too, don’t care what gasoline costs because I prefer to drive. Don’t see myself walking or bicycling.

        All this plays into the psyche of the oil industry. If Americans are addicted to oil, they will pay whatever the oil companies charge for it.

        And the US government is implicit in its support for higher oil prices because of the higher revenues it generates for the nation’s coffers.

        • 0 avatar
          VoGo

          High oil prices reduce demand for gasoline, as consumers search for substitutes and overall economic activity declines.

          Which means that federal revenues actually decline, because the tax is collected on sales per gallon of gasoline.

          More importantly, low oil prices are good for US business (except fraking) and US consumers, so there is good reason for the US government to put in place policies to reduce oil prices.

          • 0 avatar
            highdesertcat

            “High oil prices reduce demand for gasoline”

            It hasn’t so far. I never saw fewer people buying gasoline in my travels when gas was >$5/gal.

            “More importantly, low oil prices are good for US business (except fraking) and US consumers”

            I agree, but I also think fracking is real good for the US. There is a distinct economic difference between counties that allow fracking and those that do not allow it.

            “there is good reason for the US government to put in place policies to reduce oil prices”

            The US government hasn’t done anything to reduce oil prices — if they had, the Keystone Pipeline would be operational today.

            As it is, all that Canadian oil is hauled on rails, with all the complications that brings.

            I remember when the Alaska pipeline was the controversial issue of the day. Imagine where we would be now had that project been stalled like Keystone is stalled for political and ideological reasons.

          • 0 avatar
            MrIcky

            highdesertcat> then you weren’t paying attention. High oil prices absolutely effected demand. And where people had to drive no matter what, it effected their ability to buy everything else.

          • 0 avatar
            Landcrusher

            Oil demand is inelastic in the short term, but not in the long term. It’s almost like you could draw two lines for the demand and draw them separately.

            US government should really just be less active in making policy that affects pricing. It would work out. Certainly, shocks are to be avoided, but mostly ensuring against price fixing and global calamities would be just fine. Of course, those two run into each other due to OPEC and Mid East policy collisions.

          • 0 avatar
            highdesertcat

            MrIcky & Landcrusher, different parts of the US are affected differently by price and I’m sure that in the East where the majority of people live, the demand for oil could very well have been way, way down, when the price went way, way up.

            But even in California I did not see a decrease in traffic during my trips there when gas was >$5/gal.

            At $5/gal, living in the Great Southwest, I didn’t buy any less gas but I had less money left over for Starbuck’s, Applebee’s, Chili’s, or even Golden Corral. Hell, near the end of the month even Burger King and McDonald’s were out.

            So, I recently made different arrangements because of my location, and because my wife now works from out of our home since her parents retired.

            I now have my gasoline delivered to the house in the middle of nowhere; two 55-gallon drums every week, from PEMEX in Ciudad Juarez, Mexico, bought at Mexico prices, payable in USD. God, what a difference in price!

            Under NAFTA, fuel (gasoline and diesel) can be imported tax-free for personal use, i.e. 18-wheelers crossing the border from Mexico into the US, with 200 gallons in their fuel tanks so they don’t have to tank up at the higher prices in the US. I don’t know the details. I don’t care. It works for me.

            I no longer have to drive 26 miles into the nearest town to top off my gas tank, and fill up four 5-gallon jugs to refill my stash at home for my AC generators.

            Love it! Until NAFTA, this possibility did not exist.

          • 0 avatar
            Landcrusher

            HDC,
            Cali is a bit strange, but like I said, it’s inelastic in the short term. Then, people start moving closer to work, buying better mileage cars, and transport costs adjust (and let me tell you, freight prices for a lot of items are hyper elastic in my experience). Moving in Cali and buying a new car there are tougher than most places.

            Another thing about Cali is that the traffic is guaranteed. You simply won’t notice a twenty percent change because I believe it will change the length of the rush hour rather than the trip time during the rush hour. This is because so little of Cali is on a grid like the Midwest.

          • 0 avatar
            highdesertcat

            LC, yes, I see it that way too. In NM people p!ss and moan about the price of gas but they never buy any less of it unless they’ve run out of money.

        • 0 avatar
          redav

          And yet, Americans pay far less than other western countries for gasoline. If you want to talk about profits, just look at the margin their govts make on petrol–it approaches infinity not because of how high their tax revenue is, but because they have virtually no costs associated with producing it.

          That’s something to keep in mind the next time there’s a rant about traffic tickets or RLCs being used to generate revenue.

      • 0 avatar
        TW5

        Considering the unintended consequences of the 1980s oil collapse, I find it difficult to believe the US and Saudi Arabia would do it again, especially now that Iraq is the US’ responsibility and the US relies heavily on oil production.

        Anyway, I’m not convinced Saudi Arabia didn’t collapse the price of oil unilaterally in the 1980s to end the Iran-Iraq War by bankrupting the belligerents.

  • avatar
    PenguinBoy

    “from the oil shales in Alberta”

    That should be oil *sands* in Alberta.

    This will have a big effect on Canada (and other resource producing nations), but will probably be good news for the US, and for US automakers with their truck heavy product mixes.

    • 0 avatar
      highdesertcat

      I like to see Canada do well. Not only because my brother-in-law is a Canadian who resides in both Vancouver, BC, and the Kent-Des Moines area of Seattle, WA, but if Canada does well, maybe it will become the preferred destination of all the illegal aliens crossing the border in New Mexico, USA.

      Giddy-yap, dough-gies, head’m up, move’m out! Rawhide!!!!!!!!!!!

      Yep, we’ll send them on their way.

    • 0 avatar
      mikey

      Lower oil prices drive down the Canadian Dollar. An 80 cent Loony would be great news for Canadian auto production.

  • avatar
    Hummer

    Hopefully this creates mutiny and it drops the price per barrel to half that number.

    Cheapest price per gallon I’ve seen is $2.99, need to get closer to a more reasonable >$1.99.

    • 0 avatar
      hreardon

      Hilarious. A cup of coffee is more expensive than a cup of gasoline. Which one provides more productive effort?

      • 0 avatar
        Hummer

        Not sure what fancy place your getting your coffee, but my $7 can of coffee last a pretty long time.
        Then again I don’t drink coffee, but even so.

        • 0 avatar
          Landcrusher

          Any of those fancy places that add the water for you will charge more for coffee than gasoline.

          Canned coffee is more accurately compared to unrefined oil. Don’t you think? :)

          • 0 avatar
            Big Al from Oz

            @Landcrusher,
            You must realize there are people in the world that are unrefined like Hummer.

            If he is happy making a coffee with what is essentially burnt flour then so be it.

            If you like coffee come to Australia, we in fact have a very large and fantastic coffee culture.

            I do know I’ll get shot down for this comment, but it could be the best in the world.

            We have an espresso culture, not those other lesser coffee styles.

            Even Starbucks (garbage) can’t get a foothold in Australia. The mom and pop operations have a strangle hold on it.

          • 0 avatar
            bball40dtw

            Some of the best coffee I have ever had has come from the most unrefined sources.

          • 0 avatar
            redav

            bball, you mean from a weasel’s butt?
            http://most-expensive.com/coffee-in-world

            Re: coffee v. gasoline, I’m not a coffee drinker, but I thought a cup of coffee from anywhere was more expensive than a *gallon* of gas.

            I find it insulting that gas is cheaper than bottled water, especially when that water is typically nothing more than filtered tap water. If you went back in time and told people the most outrageous facts of the now present-day, one would be how much people pay for water and another would be that we carry a device in our pockets that has access to all the information in the world, and we use it to look at pictures of cats.

          • 0 avatar
            bball40dtw

            I haven’t had the Civet coffee. I heard good things, but I haven’t had the chance to try it. I was referring to coffee in small towns in Columbia while I was deployed there. Coffee always seems to come out of unstable areas.

          • 0 avatar

            bball, they have you duped. Coffee comes from quite stable areas. Little wonder due to long maturation growing-into-tree periods. BTW, you can grow your own coffee tree in your backyard. With enough dedication, it grows anywhere though the frut can be difficult. Quite ornamental.

          • 0 avatar
            Landcrusher

            Big Al,
            I have often heard high praise for Australian Coffee. Brag away and enjoy. :)

          • 0 avatar
            bball40dtw

            Marcelo-

            Let me rephrase; the coffee producing areas I have been to, Columbia, Peru, and Bolivia, I was not there to visit as a tourist. I was there as an advisor from the US Army. The unstable areas have more to do with America’s and Europe’s unquenchable thirst for illicit drugs than anything governmental.

            The US Government was encouraging the coca farms to switch to coffee production. I know there are some mega-farms in Brazil, as well as the rest of South America, but in Peru and Colombia, there was strife between farmers and traffickers. If I never have to deal with the Shining Path again, that will be fine with me.

            Actually, I might trust the Shining Path over Monsanto.

          • 0 avatar
            Power6

            The largest hot coffee at starbucks, a venti, is $2.30 with MA sales tax (your local price may vary) a good ways cheaper than a gallon of Gas.

  • avatar
    thelaine

    Now would be a good time to end expensive ethanol subsidies, since it is obvious that oil and natural gas are plentiful and proven reserves keep growing.

    It is corporate welfare based on irrational fear and corruption. Typical ploy to create a false crisis and exploit it.

    • 0 avatar
      redav

      I’m not opposed to ethanol, but I do oppose ethanol from corn.

      I’m not opposed to ethanol being used as a fuel, but I do oppose ethanol in gasoline.

      Let the midwest make ethanol, but let them use it locally. Get farm machinery, generators, etc., that are designed to run exclusively on ethanol (its higher octane rating permits higher compression ratios which makes up for its lower energy). That minimizes the problems of transporting it since it can’t go through normal pipelines, and I favor them sticking it in their own lawn mowers instead of mine.

  • avatar
    IHateCars

    The oil down the desert way has been shakin’ to the top…

  • avatar
    TW5

    What does Saudi Arabia gain by posturing against the United States? OPEC is fighting about the size of production cuts and who should make them. Saudi Arabia refuses to shoulder the burden themselves, and they aren’t really interested in special interim meetings. When inevitable allegations of US pandering are made by other OPEC members for their own political leverage, the Saudi oil ministers have to make conspicuously public announcements about their (previously) secret plans to scuttle US oil investment.

  • avatar
    Landcrusher

    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.

    • 0 avatar
      redav

      Re: opening new leases for drilling–you are looking at nearly a decade to first oil.

      There aren’t surveys done in those areas. A significant amount of geological work would need to be done. Then, development of an offshore field takes around 6 yrs or more. Planning alone can be 4 yrs or more, and once contracts are awarded, it can take another couple years to receive the equipment, drill, and install the completion.

      One reason big oil companies are successful is because they have to have a long-term & thorough approach to everything they do. Without it, they go belly up in a hurry because the sunk costs preceding first oil are often in the billions of dollars.

      • 0 avatar
        Landcrusher

        Nope. A decade is for deep water. Shallow water and on land can be turned around in just a few years. We are programmed to think its a lot longer because a few years ago all the new wells were deep water. Due to new fracking tech the land options are back and Florida, and some parts of Cali coast, are ready and easy to produce. True, not a lot of data on Florida, but it would be really odd not to find it quickly given the geology.

    • 0 avatar
      Brad2971

      Why drill off FL’s coast when this nation already has high recovery rates for Bakken, Eagle Ford, and Permian shales (production from all three has added 3.5 million BPD since Obama was sworn in as President)? You may want to consider that offshore drilling is, at present, a more expensive and vulnerable form of oil production.

      In fact, there are studies that have been done in the last two years that state upwards of 90% of Bakken crude production is profitable at prices as low as $60 USD/barrel.

      • 0 avatar
        Landcrusher

        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!

  • avatar
    bunkie

    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.

    • 0 avatar
      Pch101

      This war against ISIS has to potential to help Iran. That isn’t going to please the Saudis.

      Russia backs Assad in Syria. The Saudis would like to see him step down.

      US fracking and Canadian shale are both hurt by lower oil prices, since the production costs are high.

      Iran and Russia need the oil revenue in the short run more than the Saudis do.

      It would make sense for KSA to support lower prices during the interim. That would provide a way to kill four birds with one stone.

    • 0 avatar
      schmitt trigger

      Bunkie:
      +1 on your comment.

      I believe that the second word you are referring to rhymes with duck.

      That area of the world is an unmitigated mess, thanks -in part- to the Sykes-Picot agreement during WW1’s waning years.

      • 0 avatar
        highdesertcat

        “That area of the world is an unmitigated mess, thanks -in part- to the Sykes-Picot agreement during WW1’s waning years.”

        I see I’m not the only one who remembered that part of history. Seems like they still taught things when I went to school, aeons ago.

        And I’m not even a History Major!

      • 0 avatar
        bunkie

        A few months back I read Lawrence in Arabia and got my introduction to Sykes and Picot and their infernal agreement.

        Plus ca change, plus c’est la meme chose.

        • 0 avatar
          highdesertcat

          Oui!

        • 0 avatar
          Landcrusher

          Ah, but how to best cleanup the mess, mon ami.

          • 0 avatar
            highdesertcat

            LC, I believe those are the unintended consequences of well-meaning policies instituted by the ruling powers in the best interest of the most people.

            We wander off into political motivations here; i.e. the current economic policies of the US do the most good for the majority of Americans who voted for it, albeit at the expense of the productive, taxpaying 53% of Americans who pay for it all. It’s called redistribution of America’s wealth….

            When they drew the lines in the sand, post WWII, the end result was what we all now have to live with. Political expedience does not good neighbors make.

            My buddy and his parents were displaced by those political lines when his parents were kicked out of the Dutch East Indies, now known as Indonesia, in Dec 1947.

            Sad story that. They lost everything. And the reception they got when they arrived in Holland (The Netherlands), their country of nationality, was less than welcoming.

            Ahh, but this is neither the place nor the topic for such political analysis.

          • 0 avatar
            Landcrusher

            I just like to point out that the origins of the Mideast issues are well known and yet still debated ad infinitum.

            I really enjoy to watch the cowards run when you ask for solutions because as soon as you make a proposal, someone is going to come at you like a starving tiger.

          • 0 avatar
            highdesertcat

            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?

  • avatar
    tomLU86

    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.

    • 0 avatar
      Lorenzo

      Actually, America’s new-found oil is NOT hard to get and is not that expensive, since the oil from shale is very high quality. America is a closed market, domestic producers can’t export, so refiners are getting cheaper oil and CAN export refined oil products.

      We’re not only importing less oil, we’re exporting more high quality gasoline and diesel, putting downward pressure on the world price of oil. The Saudis are just running with it, trying to kill off the foreign high-cost producers they compete against. Brent will go back up, but WTI will remain lower cost. Texas oilmen are just beginning to tap the Eagle Ford formation, which dwarfs Saudi reserves.

      Look for the Saudis to kill off high cost foreign producers of lower grades of oil so they can have a larger share of the world oil market outside of America, which will eventually be self-sufficient. Then the Saudis will try to keep our ban on oil exports in place so our excess doesn’t flood the world markets.

    • 0 avatar
      Pch101

      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.

  • avatar
    bd2

    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.

    • 0 avatar
      Landcrusher

      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. :)

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