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Page added on October 29, 2014
Why Does Saudi Arabia Seem So Comfortable With Falling Oil Prices?
Oil prices continue to tumble: down about 25 percent since mid-June to a four-year low, and many analysts believe there is no end in sight.
While that’s good for consumers and most businesses in the U.S., the falling price is bad for oil-exporting countries such as Russia, Venezuela, Iran and Iraq.
And blame — or credit — for the plummeting prices is falling squarely on Saudi Arabia.
The kingdom, often called the “central banker of oil,” is still the key player in oil prices, says Rachel Bronson, author of Thicker Than Oil: America’s Uneasy Partnership with Saudi Arabia.
“The Saudis have shown themselves to use oil politically throughout their recent history. They’re quite good at it; they think of oil as a strategic commodity and kind of their key lever of influence globally,” says Bronson, a senior fellow with the Chicago Council on Global Affairs.
Normally when oil prices begin to slide, she says, Saudi Arabia will step in and slow production, which will help bring up the price.
But not this time: The Gulf state hasn’t made any move to reduce oil production.
Jim Krane, an energy expert with Rice University in Houston, says because it hasn’t given any indication why, figuring out Saudi Arabia’s motives is creating something of a parlor game.
“If you’re somebody who looks at geopolitics and energy, you could come up with any number of ways or any number of reasons why the Saudis are not doing what they would usually do,” says Krane.
“There [are] lots of good reasons for them to keep on producing, but exactly why they’re doing it, probably only a few dozen people in Saudi Arabia know that,” he adds.
One popular conspiracy theory is that Saudi Arabia is trying to deprive Russia of valuable oil revenues because of its support of Bashar Assad’s regime in Syria. Saudi Arabia is opposed to Assad.
Another target is its archrival in the region, Iran. Bronson says the low oil prices are hurting Russia and Iran, both of which depend heavily on oil exports and require higher prices than Saudi Arabia does to meet all their domestic needs.
“The Saudis are always mindful of oil prices. They always try to keep the oil prices high enough for them to cover budget, but low enough to hurt the Iranians,” says Bronson.
Another theory is that Saudi Arabia is manipulating the markets to try to quash competition, especially from new oil producers like those involved with the Canadian oil sands and the shale revolution in the U.S., says Krane.
“They figure if prices go down and they help them go down a little bit, some of these people will be forced out of the business and the Saudis will be able to maybe scare some people away and retain their market share,” he says.
Krane says demand for oil has fallen off in Europe and Asia — China especially — and there are more exporters vying for a smaller piece of the market.
The Saudis went through this before, in the 1980s, when there was a surplus of oil. The kingdom cut production, which stabilized prices, but then had to fight to gain back that market share in the years that followed.
Amrita Sen, chief oil analyst at Energy Aspects in London, says Saudi Arabia doesn’t want the same thing to happen again.
“There has been a lot of market share taken away from them in Asia, which is their biggest market, because of discounted crude from Iraq and Iran. And that is something that has been a nagging problem for them,” she says.
Saudi Arabia has $500 billion in reserves, and unlike many other oil exporters in the global energy market, says Sen, has the ability to ride out the low prices.
26 Comments on "Why Does Saudi Arabia Seem So Comfortable With Falling Oil Prices?"
rockman on Wed, 29th Oct 2014 8:39 am
“But not this time: The Gulf state hasn’t made any move to reduce oil production.” Prior to the recent increase in production the KSA had consistently lowered production for the previous 6 months.
Let me offer the fully detailed question: Why Does Saudi Arabia seem so comfortable with falling oil prices that provide them with 300% more revenue then they were receiving just 10 years ago? Maybe it’s just me but I would be rather content if my income had tripled in the last 10 years. Anyone else? LOL
Nony on Wed, 29th Oct 2014 8:47 am
I think they would prefer 110 even more.
I think they just lie a little. Look at when prices rose from 30 and they just said “oh, we don’t want them to go up, we just can’t help it.”
I think they prefer 40 to 30. Prefer 80 to 40. Prefer 110 to 80. And 150 or 200 would be nice too!
Any other businessperson would feel this way. I’m sure Rock prefers oil prices higher. 110 is better than 80 for him. And 80 is still better than 30. And 150 or 200 would make him even richer.
Davy on Wed, 29th Oct 2014 9:23 am
NOo, the KSA learned the hard way on price volatility. Their view of price is not your business person view. They are at a higher level than business. We are talking socio-political survival. Prices are relative in this game.
At $80 oil prices are still great for KSA per Rocks statement and maybe beneficial to their political aims. There is more to life NOo than econ 101.
westexas on Wed, 29th Oct 2014 9:32 am
Just a little reminder that 2014 would appear to be the ninth straight year in a row that Saudi net exports of oil have been below the 2005 rate of 9.1 mbpd (total petroleum liquids + other liquids).
This is in remarkable contrast to the increase that they demonstrated from 2002 to 2005, as their net exports increased from 7.1 mbpd in 2002 to 9.1 mbpd in 2005, as annual Brent crude oil prices increased from $25 in 2002 to $55 in 2005.
buddavis on Wed, 29th Oct 2014 9:35 am
I do not think it is a matter of being comfortable, but it is a price they are willing to pay, and can easily pay, to get other things they want. In my opinion.
marmico on Wed, 29th Oct 2014 9:57 am
This is in remarkable contrast to the increase that they demonstrated from 2002 to 2005
Cherry picker.
Why do insist with incessant diarrhea about KSA exports? Have you ever heard of peaks and troughs? You analyze from peak to peak or trough to trough or a mean.
2002 was a trough. KSA exported 7.1. 2009 was a trough. KSA exported 7.6. The 2002-2013 mean is 8.4. In 2013 KSA exported 8.7.
bobinget on Wed, 29th Oct 2014 10:10 am
EIA Report
note the last paragraph in particular: (Caps mine)
Summary of Weekly Petroleum Data for the Week Ending October 24, 2014
U.S. crude oil refinery inputs averaged over 15.1 million barrels per day during the week ending October 24, 2014, 79,000 barrels per day less than the previous week’s average. Refineries operated at 86.6% of their operable capacity last week. Gasoline production decreased last week, averaging 9.1 million barrels per day. Distillate fuel production decreased last week, averaging 4.5 million barrels per day.
U.S. crude oil imports averaged 7.1 million barrels per day last week, down by 376,000 barrels per day from the previous week. Over the last four weeks, crude oil IMPORTS averaged 7.5 million barrels per day, 3.6% below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 493,000 barrels per day. Distillate fuel imports averaged 40,000 barrels per day last week.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.1 million barrels from the previous week. At 379.7 million barrels, U.S. crude oil inventories are near the upper limit of the average range for this time of year.
Total motor gasoline inventories DECREASED by 1.2 million barrels last week, and are in the lower half of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories DECREASED by 5.3 million barrels last week and are near the lower limit of the average range for this time of year. Propane/propylene inventories fell 1.3 million barrels last week but are well above the upper limit of the average range. Total commercial petroleum inventories decreased by 8.5 million barrels last week.
Total products supplied over the last four-week period averaged over 19.3 million barrels per day, UP by 1.2% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged over 8.8 million barrels per day, down by 1.1% from the same period last year. Distillate fuel product supplied averaged over 3.6 million barrels per day over the last four weeks, down by 4.0% from the same period last year. Jet fuel product supplied is UP 8.2% compared to the same four-week period last year.
Plantagenet on Wed, 29th Oct 2014 10:31 am
It’s not surprising that KSA doesn’t cut production — as rock points out KSA is still making money. What is surprising is that the largest energy producer in the world —-the USA—– doesn’t cut oil production.
bobinget on Wed, 29th Oct 2014 10:33 am
Two refineries of substance have come back on line.
The big one in Richmond,CA will be down at least 90 days. IOW’s we on the West Coast could be looking at
higher diesel and diesel prices.
I can’t recall jet fuel moving up so quickly. Managers must have taken advantage of the recent price drop.
Record corn and wheat crops will have tractors busy right up to Thanksgiving when we will see canny
farmers restocking diesel.
That increase of 2.1 million barrels was predicted.
When refineries close for maintenance they don’t make
products.
BTW, total products supplied last week is 100,000
BB p/d more then last week which was also 2% over
last year. (at this time)
ATC, today’s rep[ore in bullish for consumption IMO.
Air ‘strikes’ on Iraq and Syria will consume as much as
OPEC plans to cut production in November.. 400,000
BB p/d figure this takes a half million off the table.
IS has made advances in Iraq. That Collation Forces will be called upon to defend one million barrels p/d is
almost certain.
While Libya is exporting one million barrels daily
that African nation is on the brink of becoming a failed state. Watch for Islamist fighters of one brand or another claim Libya as its own.
Yemen meanwhile could be the next hot zone.
Kenz300 on Wed, 29th Oct 2014 11:32 am
Lower prices hurt Iran and Russia…..KSA likes that…
Lower prices slows investments by the competition….. KSA likes that..
Lower prices will help the growth of the global economy and recovery from the Great Recession…..
KSA looks at this as an insurance policy. By helping to stabilize the world economy and helping growth rates pick up around the world thru lower (but not too low energy prices) they are hoping that the world GDP will not slow any more which would drive down prices more than KSA or anyone else wants.
The world economy needs to continue its recovery from the Great Recession. Lower oil prices will be a boost to the world economy at the expense of Russia, Iran and some oil producers.
bobinget on Wed, 29th Oct 2014 12:08 pm
If KSA cared about Western economies as Kenz pro ports, why did they permit wealthy Saudis to finance
terrorist armies?
No.
The Royals understand Russia and Iran have KSA in their sights. By supporting disident forces in Syria,
(it ALWAYS get back to Syria) The Saudis incurred the mother of all Fatwas from Iran and Russia.. (ok maybe V.Putin doesn’t do fatwas.. but Russia and Iran
can see what happens when dictatorships are overturned… See: Libya, Iraq.
By playing the ‘over-production’ game the Saudis are
walking on slippery sand dunes. NONE of the other OPEC members are happy about lower prices.
Look at this from a ‘Peak Oil’ POV.
When great oil producers like Venezuela or Libya
run so low they become Net Importers of oil, what
are they to sell? The people get ugly when it’s discovered their heritage birth right was blown away on winds of wanton thievery with little to show.
Indonesia, Egypt once oil exporters. Now big time importers, rely on tourism. Now, there are many safer, interesting places to visit then CarJack capitol of South America or Military dictatorship Egypt.
Note, not once did I mention Ebola.
Wisdom! Always give 100% …except when donating blood.
rockman on Wed, 29th Oct 2014 12:12 pm
“What is surprising is that the largest energy producer in the world —-the USA—–doesn’t cut oil production.” Easy answer: because the US doesn’t produce oil…the companies in the US produce the oil. OTOH the KSA govt controls oil production. AFAIK the only regulatory body in the US that HAS legal authority to restrict how much oil operators are allowed to produce in the Texas Rail Road Commission with its “allowable system”. The TRRC has mandated what percentage of a well’s production rate would be allowed for many decades. Initially wells were given less than 100% allowable in order to maintain higher prices. Even today the commissioners meet every month to set the allowable. Since the early 70’s the allowable has been unchanged at 100%.
shortonoil on Wed, 29th Oct 2014 12:55 pm
If the Saudis knows what is going on, and we can assume they do (we have shipped a number of copies of our report to the Middle East over the last nine months) it certainly would not befit SA to cut production by any significant amount at this time. The Saudis know that production costs will be increasing as prices will be declining. High cost producers will be priced out of the market over the next few years regardless of what they, or anyone else does. The Saudis certainly do not want to jeopardize the world economy, but for them to cut production would only be self defeating. They will be one of the last producers of low cost, high quality crude left on the planet, and to keep their fields producing as efficiently as possible, for as long as possible, is in the best interest of everyone.
http://www.thehillsgroup.org/
nemteck on Wed, 29th Oct 2014 1:19 pm
“Maybe it’s just me but I would be rather content if my income had tripled in the last 10 years.”
Tripling the oil price is not enough for the Saudis to service all the handout items in their budget, trying to sooth the public not to start a revolution.
rockman on Wed, 29th Oct 2014 1:36 pm
“Tripling the oil price is not enough for the Saudis to service all the handout items in their budget, trying to sooth the public not to start a revolution.” They were able to do just that 10 years ago with less than 1/3 of the current income at the lower current price. What’s changed?
keith on Wed, 29th Oct 2014 4:32 pm
It’s austerity time in the Mid-east. They need proof. Perfect time for U.S. Dem. as well.
Nony on Wed, 29th Oct 2014 5:50 pm
Go find some more oil, Rock. Glut the market and push the price down (you’ll still make lots of moolah…just screw the other producers.)
synapsid on Wed, 29th Oct 2014 6:48 pm
bobinget,
…Libya exporting one million barrels daily…
I’ve been wondering about this. I’ve seen production numbers; do you have a source for export numbers?
Thanks.
Makati1 on Wed, 29th Oct 2014 10:27 pm
And then there is this:
http://www.arabnews.com/economy/news/652216
or
http://journal-neo.org/2014/10/30/rus-saudovskaya-araviya-na-poroge-tyazhely-h-reshenij/
Makati1 on Wed, 29th Oct 2014 10:33 pm
Then again… “Doing something twice and expecting a different result”
http://www.globalresearch.ca/after-the-us-election-an-escalation-of-the-mideast-war/5410681
http://www.globalresearch.ca/big-oil-qataris-saudis-lick-lips-as-us-fights-isis-by-bombing-syrian-pipelines/5410233
Makati1 on Wed, 29th Oct 2014 11:17 pm
Another perspective:
http://www.washingtonsblog.com/2014/10/whats-behind-lower-gas-prices-bombings-syria-southeastern-ukraine.html
GregT on Wed, 29th Oct 2014 11:58 pm
Thanks Makati.
http://www.washingtonsblog.com/2014/10/whats-behind-lower-gas-prices-bombings-syria-southeastern-ukraine.
Bang on. Keep a close eye out boys. Assad will be taken out, and after he has been, Iran will be next on the list.
Davy on Thu, 30th Oct 2014 4:53 am
Greg, I don’t see it happening. It takes boots on the ground to remove someone like Assad. There is no chance in hell of Iran being removed. Even if they are bombed by an initial Israeli strike then follow up US strike it will not be effective without a ground invasion.
Makati1 on Thu, 30th Oct 2014 7:29 am
I agree. And it will be a bloody ground fight in the ancient deserts of Persia. IF we get to that point. I don’t see it happening. Iran has two powerful partners in China and Russia.
GregT on Thu, 30th Oct 2014 8:59 am
The goal all along has been to take Assad out of the equation. This should be obvious to anyone who has been paying attention. How long Russia and China will continue to show restraint, is the big question. Given the track record of TPTB in DC, I don’t see them changing course now. I see them escalating the conflict. They either plunge Syria and Iran into sectarian violence, further destabilizing the region, or they will ignite WW3. Either way, the oligarchs have nothing to lose, and everything to gain. War has always be profitable for those behind the scenes.
rockman on Thu, 30th Oct 2014 9:34 am
“…you’ll still make lots of moolah…just screw the other producers.” Actually trying to do that right now. A company in west Texas made some foolish decisions and are now financially crippled. With this latest drop in oil prices it’s akin to blood in the water for some companies. Whatever deal he thought he could make has been degraded with the drop in revenue from his wells. And now, just like ever diligent buzzards, we’re about to swoop down and start tearing the flesh off his bones.
Again, it isn’t personal…just business. LOL.