Oil Talk

Shaybah, Saudi Arabia

Oil is at a 3 year low as OPEC argues over the collective problem of low prices. Saudi Arabia is actually ready to accept a price of $80 dollars a barrel for the next year or two. They are willing to do this to defend their share of the global market. In June it was over $107 dollars a barrel. The point is that the price of crude oil has fallen to a new 3-year low earlier this week because of a disagreement between the members of OPEC on how to share the pain of lower prices.

Saudi Arabia is the largest producer in the Organization of Petroleum Exporting Countries (OPEC), which altogether produces a third of the world’s oil supply. What that means is that they, together, keep the balance of supply and demand in the entire market. Since Saudi can undercut almost every other country in OPEC, it has a large influence on regulating the overall supply of the organization. On the one hand, demand is weakening as the Chinese and European economies slow down, while on the other, global supply is increasing because Iraqi and Libyan exports are rebounding from war-related disruptions. Plus, the United States is pumping more oil from its own shale deposits.

Saudi Arabia slashed official selling prices for customers in Asia and Europe which shows its intentions for the short term. This action has led Iran and Iraq to do the same. This type of development has created a tension within the OPEC membership whose 12 different members have increasingly different agendas. For instance, Venezuela and Iran need high prices to support their budget spending, so they are not happy at all. A price war between the gulf states and those that need higher pricing will probably benefit the US and European consumers because it will lead to lower gasoline prices. However, it will lead to secondary effects as well.

For shale producers in the United States, things will get harder. Up to about 40% of American oil supplies will probably be unprofitable at prices below $80 a barrel. The real effects, though, will be on other oil producing states. Take Russia. Russia needs an oil price at $114 a barrel for its entire budget to be balanced this year. With Western sanctions, it needs a balanced budged because it can’t borrow from capital markets right now. The ruble has hit an all time low of about 40.44 to the dollar and it has lost 16% against the dollar since this summer. That means raising defense spending for Russia is not within the budget. Obviously, Saudi Arabian and Russian relations have worsened over time.

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