Does Saudi Arabia really care which high cost oil producers go under? One analysts says, no
Mark Mills has a theory about the Saudi market share strategy that goes a long way to explaining why some OPEC members are circulating a letter seeking production cutbacks and higher prices.
The prevailing view is that Saudi Arabia, the biggest OPEC producer at around 10 million b/d and the most influential voice at the table, has declared war on high cost American shale drillers. The Saudis are worried global oil markets may see “peak demand” in the near future as governments trim carbon emissions and economies switch to renewable energies and electric vehicles (75 per cent of oil is used in transportation).
Mills, a Manhattan Institute analyst, said in an interview with American Energy News that he think the Saudis don’t really care which high cost producers are forced out of the market. In fact, he likens the Saudi strategy to a science experiment.
“My theory is that the Saudis really don’t care who drops off production. I don’t think they’re going after the shale producers per se, though they would never say this. I think they’re going after any high cost producers to get them out. That will tighten up supply” and raise prices, he said.
American shale producers have shown remarkable resilience in the face of lower crude oil prices over the past year. They have driven down costs by cutting service company expenses and adopting new technology.
“My theory, and this is just pure speculation, is that the Saudis don’t care who gets flushed out particularly but they are very interested to find out the financial and economic dynamics of the American shale business because it’s so new,” Mills said.
What the Saudis are learning is that American companies can innovate and compete, and they may be able to lower production costs to $15 or $20 a barrel, roughly the same range as their Middle Eastern competitors, according to Mills.
If that turns out to be true, other OPEC members will be under intense pressure. In fact, cracks are already beginning to show in OPEC’s united front over crude oil production and international market prices, which are in free fall again and breached $40/b Friday.
“The Saudis have flooded the market which leaves no room for others,” a source close to OPEC told Andrew Critchlow of The Telegraph. “People in OPEC are fed up with the Saudi policy of overproducing since November and have lost a lot of revenue because of this.”
“Individual quotas need to be restored.”
Critchlow is reporting that Algeria has circulated a letter within OPEC lobbying oil ministers to restore prices, including measures for individual production quotas within the group which would prevent certain countries from over-producing.
Saudi Arabia and its close Gulf allies the United Arab Emirates, Kuwait and Qatar now produce over 18 million b/d of the roughly 30 million b/d of OPEC supply, leaving little room for countries such as Iran, Libya and Iraq to increase their output.
Other OPEC members such as Libya, Venezuela, Nigeria and Algeria are in serious financial trouble and need oil prices well north of $100 to balance their budgets.
The Algerian letter suggests the tension cannot continue much longer and one or more OPEC countries may soon crack.
Which one will it be?
If Mark Mills is right, the Saudis don’t really care.