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It will take much cheaper oil for Saudi Arabia to take action

It will take much cheaper oil for Saudi Arabia to take action thumbnail

THERE comes a time when any self-respecting cartel boss has to focus on protecting his turf. Saudi Arabia has spent the past nine months fighting to safeguard its share of the global oil market, increasing its own crude production to record highs. That exasperates its weaker OPEC partners. It also seems utterly self-defeating, especially after world oil prices plunged below $45 a barrel on August 24th, a six-and-a half year low. Some say its folly is attempting to fight an unwinnable war against American “frackers”. But its eye may be more on local Shia-led rivals, Iraq and Iran.

On August 23rd OPEC-member Iran echoed the frustrations previously aired by Algeria and said it would welcome—or “not disagree with”—an emergency meeting of the producers’ cartel to shore up prices. Yet two days later Bijan Zanganeh, its oil minister, outlined plans, once nuclear-related sanctions are lifted, to eventually add 1m barrels a day (b/d) to production, reclaiming lost market share. (He also said investment had shrunk to almost nothing, so it was not clear how Iran would achieve this.) Iraq, too, is pumping hard to make up for production lost during years of sectarian conflict. The Paris-based International Energy Agency says Iraqi crude output has jumped by 740,000 b/d in the course of this year, a much larger proportional increase than Saudi Arabia’s

The kingdom can respond in several ways. It can turn a deaf ear to calls for a co-ordinated cutback, as it has since imposing an OPEC agreement in November to let market forces set prices. It could blame a weakening Chinese economy for the failure of that policy, and suggest it is ready for a rethink. Or it could strike a bold agreement with Iraq and Iran for output quotas.

The latter, analysts say, is the most difficult because Iraq and Iran believe the Saudis have stolen market share from them during their recent troubles, and are relatively low-cost producers so able to withstand a price war. Tensions over regional supremacy between the Sunni Saudis and Shia Iran also cloud the picture, though analysts say when it comes to OPEC policy, money matters more than geopolitics.

Waiting and watching
China’s recent woes have given the Saudis a fig leaf to hide behind if they want to change course. Paul Stevens of Chatham House, a London-based think-tank, says they could pretend the low oil price is in response to slumping global demand, not over-supply. However, the kingdom is likely to be adamant that it will not bear the burden alone; between 1980 and 1985-6, its production slumped from 10m b/d to below 2.5m b/d, yet prices continued to tumble. That lesson has never been forgotten.

Bassam Fattouh of the Oxford Institute for Energy Studies notes that co-ordinating an output cut even within OPEC is not easy: when prices are falling, the most cash-strapped countries have a big incentive to cheat, until prices become so low that the extra pain of halting production is worth the gain. Though Saudi Arabia’s public spending has tripled in the past decade, needing $100 oil to balance the budget, it has foreign assets to sell and a debt ratio of just 1.6% of GDP. That gives it the leeway to avoid making a rushed decision.

It is likely to be pragmatic. The drop this year has rendered high-cost production, such as Brazilian deep-water fields and Canadian tar sands, less profitable, much as it had hoped; overall non-OPEC output growth is slowing. It may believe that the next leg down in the oil price will hurt America’s shale industry, though it clearly underestimated the cost-cutting potential in hydraulic fracturing (fracking). Mr Stevens says that for the first time since the late 1920s the oil market is being left to find its own floor—though no one knows where it is. As Al Capone, a cartel boss of that era, would have put it: “My rackets are run on strictly American lines and they’re going to stay that way.”

The Economist



60 Comments on "It will take much cheaper oil for Saudi Arabia to take action"

  1. dooma on Sun, 30th Aug 2015 11:53 pm 

    Davy,
    I hope your reassurances about my generalisations are correct.

    But it does not bode well if you look at some of the posts pertaining to THIS article alone.

    BTW, thanks for the comment about being a juvenile. I will take that as a compliment. As far as the other assumptions go-you are wrong.

    I am more frustrated and depressed with the majority of people on this planet for the same reasons that other people are here. And I am far from being close-minded. I am actually quite pragmatic.

    Alright, it was probably not the best way to introduce myself in hindsight but I cannot see any benefit in attacking each other’s POV. Especially the attacks on ‘Boat’ We should be trying to work together and educate as many people as possible. Even though at this stage, any mitigation attempts seem absolutely futile…

    Otherwise this site is a waste of space containing some very knowledgeable people IN the industry. I was in the burning brown coal (a.k.a mud) game and the power station was 20% efficient overall. What an absolute disgrace!

    But what else can you buy for a couple of dollars a metric tonne?

  2. apneaman on Sun, 30th Aug 2015 11:53 pm 

    Boat the only reason US auto sale are up is because of subprime loans with 8 year terms (ha ha ha). And that was not the zero interest rate I was referring to and you knew it, but it doesn’t matter – the world’s going down and America is too. I’m ok with it boat because I see it like you said yesterday about healthcare and old dying people. Why spend massive unsustainable amounts of resources and energy keeping a sick cancerous dying system going just for another few years? Get some dignity boat and learn to go gracefully.

  3. Boat on Sun, 30th Aug 2015 11:55 pm 

    Oh I will apeman. With a gun or whatever when I am no longer productive. I believe in paying my own way. Always have.

  4. apneaman on Mon, 31st Aug 2015 12:04 am 

    keep avoiding and evading boat, you little coward.

  5. onlooker on Mon, 31st Aug 2015 1:26 am 

    The stock market is a joke. the very nature of it is about bubbles and ponzi schemes as investors play off each other to see who is left holding the bag. During these last several years of zero to low interest rates have economies reacted NO. Oh and the ultimate bubble bursting will be when finally Banks and other lenders realize their will not be any recovery that peak oil means the era of growth has ended. Then lending will dramatically come practically to a halt. That can only mean very bad things for the overall economies of the world. So no matter where you look as Greg said all signs are negative. Enough said.

  6. onlooker on Mon, 31st Aug 2015 1:51 am 

    Also, over time especially recently valuations of stocks have become more and more detached from reality as the stock market has come to resemble a gambling casino and as investors “speculate” given that prudent investing has not been giving adequate rates of return due to poor real world performance by companies

  7. Davy on Mon, 31st Aug 2015 5:20 am 

    Doom, you do not appear to be North American. I may be wrong. Many here are too afraid of letting people know where they are from. I find it very important to our discussions. It puts a geography and culture to the point of view.

    I jumped you because you gave a blanket putdown on the Americans. BTW, you best talk to the Canadians too. They are by far the largest contributors here in the anti-Boat Brigade. Doom, what we have here is a classic doom verses corn conversation. We are good enough friends. I like Boat and I am glad he contributes. The reason I jump him constantly is he represents those around me bought into the system and claiming all is “good enough” in general , “I am great” for him personally, and the future problems will be “overcome”. I am great personally but I know that is not going to last.

    I don’t care who you are the changes ahead are going to be significant to the point of rendering class and privilege much less important. Economic abandonment, network dysfunction, abrupt climate change, and social conflict will change the world as we know it. Locations now in great shape and healthy and wealthy could become uninhabitable. Las Vegas and maybe Phoenix are immediate examples in my head of areas in location overshoot per population, consumption, and location.

    In general things are not good and the trend is down. The time frame is not certain. This bumpy plateau/descent could limp on 10 years. In that case Boat could be more or less right in the current. Ten years is both long and short depending on how you look at it. I can tell you if you are rearranging your life 10 years is not long enough to do it all. If you are a society 10 years is not enough to transition into a new system dynamics and social ecosystem. Commenting on PO 10 years is a long time. I likely won’t remember who Boat was in 10 years.

    Post fossil fuel lifestyles are near. I am sure fossil fuels will be around but not as they are today. They will be part of a hybrid adaptation to an changed world. The technologies and resources of pre-fossil fuels will become vital. Animal, human power, wind, water, and fire will become significant as they were pre fossil fuel.

    How is a Mr. Boat in Houston going to fare 10 years down the road in an adapted world. Houston is one of those cities far too large. Houston much shrink by 7/8. This means in 10 years time Mr. Boat is likely to be living north on the prairie if abrupt climate change has not made the prairie uninhabitable.

    Doom, stick around you sound like you can help us on our journey. Again I jumped you because you made a blanket unsupported anti-American comment. I am sensitive to these comments. I have decided to ignore the extremist here who do nothing but daily blanket anti-American comments. I have no problem with those who are moderate, fair, and balanced. By balance I mean discussing the rest of the world. It get annoying hearing the same old anti-American links and points over and over ad-nauseam. I have heard the same topics for 2 years now. There is a large world out there I would like to know about also.

  8. Makati1 on Mon, 31st Aug 2015 6:43 am 

    Onlooker, when Clinton dissolved the 1933 Glass – Steigle Act* that kept banks and investment firms separate, he deliberately open Pandora’s box to the bankster gamblers to play with our money. We are now witnessing the result. The collapse of the economy and the theft of the citizen’s savings thru zero interest and, eventually, the confiscation of our accounts. That is why I have only enough in my bank account to keep it open for cash transfers to me, here in the Philippines.

    * The term Glass–Steagall Act usually refers to four provisions of the U.S. Banking Act of 1933 that limited commercial bank securities activities and affiliations within commercial banks and securities firms.[1] Congressional efforts to “repeal the Glass–Steagall Act” referred to those four provisions (and then usually to only the two provisions that restricted affiliations between commercial banks and securities firms [2]). Those efforts culminated in the 1999 Gramm–Leach–Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.[3]” Wiki

  9. onlooker on Mon, 31st Aug 2015 7:16 am 

    Great point Mak, you can even go more back in time when in the early 1900’s when SECRETLY a group of very high up and influential Banksters and Business leaders met on Jekyll Island and fashioned out the modern Federal Reserve. A bank that is private and which ever since has been perverting the economic system of the US in favor of the Banking system and Big Business.

  10. shortonoil on Mon, 31st Aug 2015 9:20 am 

    “Did you pull that out of your brain. If not, show me.”

    10.5 mb/d divided by 93 mb/d equals 11.3%. Are these big numbers confusing you? World oil production has not grown by anywhere near historic levels for 5 years, and yet world inventories are at historical highs, and the price is down 55%.

    The energy to produce oil, and its products has gone up for the last 150 years. Wells have gotten deeper, water cut has increased, and the quality of oil has gone down. 37% of shale oil, on average, has an API greater than 50. Its per unit energy content has become so low that it is energy neutral to negative.

    http://www.thehillsgroup.org/depletion2_011.htm

    Since there is a fixed amount of energy in a unit of oil, as the energy to produce it increases, the energy delivered to the economy goes down. Petroleum can no longer drive a growing economy. Without a growing economy demand, and price fall. Any increase in production drives prices down. That is what is happening at present. Low prices force producers to maximize production to maximize revenue. That produces a downward spiral of ever greater production, and ever lower prices. When producers can no longer make lifting costs, wells will be shut in soon afterwards.

    Petroleum has lost the ability to drive a growing economy; soon it will loss the ability to power its own production. Economies will contract; oil prices will continue down; producers will shut their doors. The oil age will be over! All the gerrymandering, and think happy thoughts dialog in the world is not going to change the situation!

    http://www.thehillsgroup.org/

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