Saudi Brinksmanship: Economics Behind Reluctance to Fiddle with Oil Prices

Possible Ramifications for Americas, Russia

On the flip side continued depression in oil prices could seriously undermine the shale revolution in the United States, where producers cannot compete with cheap oil from the Middle East. Such a trend also jeopardizes the economics of exports from the United States, where one project has already fallen victim to less favorable oil price dynamics. Moreover, it would stifle further exploration -- particularly offshore, where explorers would prefer to wait until they get a positive signal about an upturn in prices.

An ongoing oil price slump also could spark unrest in countries that are highly dependent on crude exports. One potential hot spot that is extremely vulnerable to a dip in prices, Venezuela, has already sought help from China as it endures difficulties stemming from a slump in the value of its most prized resource. A similar financing package has been extended to Ecuador, which has been affected as well. China has been keen to expand its footprint across resource-rich Africa as well and would look to step into more countries in the region seeking assistance.

Russia, whose top exports include oil and gas, has been hit the hardest by the downward spiral in prices. The Ruble has lost nearly half of its value against the U.S. Dollar, and Russia’s investment rating has succumbed to repeated downgrades. Along with the U.S.-European Union sanctions already in place, Russia could be in a tight spot if oil and gas prices fail to rebound in the foreseeable future. Iran is another country at risk of facing a similar predicament. Both Russia and Iran are longstanding rivals of Saudi Arabia, and a tumble by either country in the race to the top of the global oil and gas trade would be no major predicament for the Saudis.

In conclusion, the Saudis' reluctance to lower crude production is based more on sound economic and business sense rather than the ulterior political motives often touted in public discourse. Some producers are bound to get hurt in the process, but market forces are invariably favorable only to the most efficient and the most resourceful.


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WHAT DO YOU THINK?


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Dr. Tom Williams  |  January 23, 2015
Generally fully agree with the opinion but it did not go far enough. Saudi (and the Arab OPEC) has faced uncontrolled production/pricing from the other OPECs and new/resumed production from Iraq-et al and NoAfrica. Saudi has often used its cheap (<$20/bbl loaded) production (could easily increase to 12Mbbl/day) to sweat/hammer/swamp those that chose not to follow their quotas and affected the Arab-OPEC markets and shares. In addition - cheap natural gas and alternative energy substitutors are cutting into other parts of the energy markets...Saudi learned the hard way that high prices leads to substituions which allow the end-users to get rid of their dependency/=share of the oil markets demands. Also remember that Aramco, UAE, Kuwait, and Oman do not live in isolation from the many old and new oil patches...they know all markets and who is buying/prices/costs/margins.....so dont fault then for being good business-partners. Good but could have been better (I know - more like what I think is right)...Lived and worked in Arab, Iran, Oman, Egypt, Syria, Russia....

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