Saudis Accept Lower Barrel Prices In Fight Against US Production

by Cameron Aubernon

October 15th, 2014 11:27 AM

saudis accept lower barrel prices in fight against us production

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.

#MarketShare #OilPrices #OPEC #PetroleumProduction #PriceReductions #ProductionCuts #SaudiArabia #UnitedStates

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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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- Redav on Oct 15, 2014
  
  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.
  
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- Landcrusher on Oct 15, 2014
  
  @redav 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.
  
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- Brad2971 on Oct 16, 2014
  
  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.
  
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- 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!
  
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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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- Pch101 on Oct 15, 2014
  
  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.
  
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- Schmitt trigger on Oct 15, 2014
  
  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.
  
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- Highdesertcat on Oct 15, 2014
  
  @schmitt trigger "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!
  
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- Bunkie on Oct 15, 2014
  
  @schmitt trigger 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.
  
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- Highdesertcat on Oct 15, 2014
  
  @bunkie Oui!
  
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- Landcrusher on Oct 15, 2014
  
  @bunkie Ah, but how to best cleanup the mess, mon ami.
  
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- Highdesertcat on Oct 15, 2014
  
  @Landcrusher 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.
  
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- Landcrusher on Oct 15, 2014
  
  @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.
  
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- 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?
  
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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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- Lorenzo on Oct 16, 2014
  
  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.
  
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- 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.
  
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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.

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- 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. :)
  
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