Saudi Arabia has wielded immense power over both the oil producers and consumers based on its proven oil reserves. It not only has the second largest proven oil reserves at 266 billion barrels, its cost of producing a barrel of oil is as low as $8.98 a barrel, according to an article in The Wall Street Journal.
In contrast, in 2014, the cost of producing a barrel of U.S. shale oil ranged anywhere between $50 to $80 a barrel, and the total proven oil reserves at that time stood at 55 billion barrels—relatively small in comparison the reserves on Saudi soil.
Using these strengths, Saudi Arabia embarked on a strategy to scuttle the rapid growth in U.S. shale oil production. Though two years down the line, Saudi Arabia has managed to reduce U.S. production and gain 1 percent of the market share, it has lost considerable market power that it once wielded.
So does the size of reserves really matter, or is there another factor at play in determining who will be king of the oil hill?
U.S. shale producers cut production costs by half
Saudi competition indeed has forced the U.S. shale oil producers to reduce their cost of production. Some shale producers in the U.S. realized they needed to curb costs in order to survive the low priced oil environment, and so they did just that. Fast forward to 2016, and the cost of producing one barrel of U.S. shale oil is now as low as $23.35 a barrel. The U.S. shale industries resilience—which came ironically at the hands of the Saudi’s—has ensured that it will stay in the competition longer than most expectations.
U.S. has more oil reserves than Saudi Arabia
Rystad Energy surprised everyone with a finding in its July report that showed that the U.S. has more oil reserves than Saudi Arabia. Their study estimates that the U.S. has 264 billion barrels of recoverable oil, though a large part of it remains undiscovered. Comparatively, Russia has 256 billion barrels, and Saudi Arabia 212 billion barrels of recoverable oil.
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According to their data, Texas alone held more than 60 billion barrels of oil, more than the existing accepted proven oil reserves in the entire U.S..
"There is little potential for future surprises in many other countries, but in the U.S. there is," said Per Magnus Nysveen, analyst at Rystad Energy. "Three years ago the U.S. was behind Russia, Canada and Saudi Arabia," reports CNBC.
However, the report has its own critics.
Saudi oil reserves might come under scrutiny if it wants to monetize Aramco
Similarly, the Saudi reporting of its own oil reserves also has its skeptics. Some of the major points highlighted by John Kemp in a Reuters article back in July are that the Saudi official estimates “were abruptly raised without explanation from 170 billion barrels in 1987 to 260 billion in 1989.”
Surprisingly, oil reserves have remained within the 260- to 265-billion-barrel level ever since, even though Saudi Arabia has consumed or exported the equivalent of 94 billion barrels since then.
“If the government data is accurate, the kingdom has managed the remarkable feat of exactly replacing each produced barrel with new discoveries or increased estimates of the amount recoverable from existing fields,” writes Kemp.
That possibility sounds unreal, but we shall know more about it if a third party is ever allowed to verify the reserves, which may become reality if an Aramco listing takes place.
A new competitor who can boost production quickly
With its spare capacity and its ability to ramp up production quickly, Saudi Arabia has earned its status as the “swing producer” of the world. And this swing-status may gift its beholder power equal to that of the size of its reserves.
"A swing producer means that virtually at the flip of a switch, you can go up several hundred thousand barrels per day or down several hundred thousand barrels per day," said John Hess, the chief executive of Hess Corp. "Shale can't do that. Saudi Arabia can," reports Reuters.
Shale producers need anywhere between six to twelve months to ramp up or down production. However, this six to twelve months is still significantly less than conventional fields, which take years to start production.
The undisputed leader finds its position weakened on all fronts
In two years, Saudi Arabia has gone from being the undisputed king of oil to a nation struggling to come to terms with lower oil prices. It has also managed to raise the very giant it wanted to suppress—U.S. shale oil.
One bright spot for Saudi Arabia remains, in that it has gained a percentage point of market share in the last two years, but with the OPEC proposal to freeze or cut production, it will not be long before Saudi Arabia loses that 1 percent market share it gained with so much pain.
By Rakesh Upadhyay for Oilprice.com
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