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Colin Chilcoat

Colin Chilcoat

Colin Chilcoat is a specialist in Eurasian energy affairs and political institutions currently living and working in Chicago. A complete collection of his work can…

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Saudi Arabia Ready For $20, $30, $40 Oil

Saudi Arabia Ready For $20, $30, $40 Oil

Brent crude and West Texas Intermediate (WTI) fell 2 and 3.3 percent respectively to start the week and Saudi Arabia is prepared to go much lower in a bid to trim the fat. Oil Minister Ali al-Naimi said as much in an interview with the Middle East Economic Survey on Monday. Naimi defended the Saudi position and made clear that OPEC nations will not cut production at any price. His comments dismiss any notion of collusion with the United States and spell trouble for producers everywhere.

Since its November meeting, OPEC production has remained relatively steady while trending upward. Libya has had a few slip-ups and Venezuelan production is hurting, but the 12-member cartel exceeded their collective target for the sixth straight month, pumping 30.56 million barrels per day (mbpd). The price however, has fallen roughly 20 percent in that period and shows no sign of returning to its June highs.

Related: OPEC Ministers Decry Price War Conspiracy Theories

For its part, Saudi Arabia accounts for nearly one-third of current OPEC production, or approximately 9.86 mbpd in the month of November. Still, production capacity is nearing 12 mbpd and Naimi suggested the oil-rich nation might put it to use sooner rather than later. It’s all part of a plan to demonstrate that high-efficiency producing countries deserve the greatest market share – an idea Naimi describes as the operative principle of all capitalist countries. OPEC produces around 40 percent of global output, but non-OPEC production is projected to grow 2.3 percent next year after a 3.5 percent expansion this year.

Non-OPEC Liquid Fuels Production

Source: EIA

Naimi’s argument obviously ignores the significant geopolitical factors present in oil trade, but is nonetheless a worthy defense. Among the non-OPEC low-efficiency producers, Saudi Arabia aims to squeeze out Russia – who they mentioned specifically – and particular plays across North America, where non-OPEC growth has been most rapid.

In Russia, President Vladimir Putin and Rosneft head Igor Sechin project calm despite the downward march of nearly every significant indicator of economic health. As the government searches for solutions to the ruble’s disastrous final quarter, Russia’s five leading oil exporters are under orders to sell part of their foreign exchange revenues in the next few months. The EIA predicts Eurasian production will see a drop of approximately 100,000 barrels per day (bpd) into next year. Energy Minister Alexander Novak has yet to revise his production outlook, but admits oil exports will decline by 4.3 percent in 2015.

Related: OPEC Calls For Widespread Production Cuts

In North America, efficiency is not really the name of the game. In 2013, US shale accounted for approximately 20 percent of world oil investment while supplying only 4 percent of global production – numbers Naimi would deem unworthy of a market share, even if that market is domestic. The side effects of oil’s decline are less evident to date, but that is not to say they have been completely absent. Despite overall growth, the EIA has lowered its expectation for US production in 2015 by 100,000 bpd. Layoffs are already underway at Halliburton and more are expected elsewhere. In all, US exploration and production spending is projected to fall by more than 35 percent if WTI averages $65 per barrel or below into 2015.

North of the border, Canada believes it can weather the storm. The oil sands, while more capital intensive up front, operate on much longer timelines than shale projects and those already online can breakeven at $40 per barrel. Even so, a handful of Canadian oil companies are slashing their 2015 capital budgets and reducing output forecasts.

It’s unclear whether or not OPEC and Saudi Oil Minister Naimi are simply trying to put a scare into markets long enough to defend their market share – and if they can even keep up in this game of chicken – but the scare is there and the advantage is theirs.

By Colin Chilcoat of Oilprice.com

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  • Joel Westermarck on December 25 2014 said:
    The biggest threat to the Saudis is ISIS and their biggest source of income is from oil. The Saudis know that ISIS has to be stopped or the whole Arab world can be destroyed from within. Saudi Arabia has been, is, and wants that status quo to stay. Non of the Arab countries has the military means to do that and they cannot turn to Israel for help.

    Showing Russia that their political muscle flexing is expensive and is not worth the cost, is just gravy.
  • Abraham on December 26 2014 said:
    IF ISIS is a threat to Saudi, its only for ruling family.
    Saudi has nothing but only oil to deliver the world.
    ISIS or any ghost Who ever comes to power has to pump the oil for it's survival.

    The new comer will be much weaker than Saudi ruling family as it is there for 150 years.So we can dictate the oil price. Our price for oil will be 50% monetary and 50% political support for the new rulers.
  • Wade on December 26 2014 said:
    Part of the Saudi's long term strategy is most likely to avoid $20-40 oil in the long run, which would cut their profits. They are obviously profiting but overall losing money by doing what they are doing right now, so they have to have a plan with dollar payback...

    When prices are so high as $150 and rising, it makes sense for large investments to be put into new drilling techniques and technology that could not only reduce the cost of drilling but also make otherwise inaccessible oil accessible at an efficient price.

    These advancement will aid in creating a large supply of new oil and at a more cost effective price. The 'easy' oil that they currently have with a high profit margin is a huge economic advantage when they can sell it at the global price much higher than what their drilling costs are. If everyone is brought to the same efficiency as Saudi from advancement in oil drilling, their advantage is lost and oil prices would hit and stay at a price just above the cost of the 'new efficient' cost of drilling. This is because everyone may then drill for a lower cost and the people with the most efficient drilling techniques will set the prices.

    To slow this direction (fracking already came about but other techniques could have followed) they can scare investors for the next umpteen years with a 'Hey, reality check, oil is only really worth under $50 barrel because we still have a large supply of easy oil that can be profited at this price, so stop investing and advancing oil technology because your investments aren't worth $50 per barrel payback. So stop it.' A result of driving the $50 barrel price, is that advancement is slowed and they can profit for a much longer time frame with their 'easy' oil, that should payback the loss of extra profit they could be getting now at $150 barrels.

    They can bask in their $50 barrels while still profiting and maybe even go up in price, just not so much to give investors enough hope to cause quantum leaps in oil advancement, which would end up crippling Saudi's oil income in the long run.
  • Jack on January 22 2015 said:
    Have you ever been in the country and on the Saudi roads ? It is in their nature and culture to play "chicken" even when faced with death defying realities. They will cut off an arm if it means they can manipulate with it. Simple fact is : Saudi needs to keep producing oil even at $5/barrel, because there is nothing else to sustain their economy. The rest of the world should be encouraged to invest and step up production of alternative energy and finish off the dependency on fossil fuel manipulation by these silly M/E "countries" with no ambition or intent of preparing for generations hense.

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