Summary: Stratfor looks at one of the big questions for 2016. Low oil prices will devastate those nations dependent on oil revenue and provide small benefits to those that consume oil. The destabilizing effect of the former will affect everybody, to vary degrees. Ten years ago people worried about running out of oil (see the comments to Peak Oil Doomsters debunked, end of civilization called off). Now they worry about too much oil. The Saudis have decided to financially destroy much of their competition (the first financial world war). When this is over Texas will beg to join OPEC. I predict that in ten years people will again worry about running out of oil. See the links at the end for more information.
Who Wins and Who Loses in a World of Cheap Oil
Stratfor, 8 January 2016
Oil prices hit their lowest level since summer 2004 this week, continuing the rapid tumble that began in June 2014. The global benchmark, Brent crude oil, closed trading Jan. 8 at $33.37 per barrel, closing out the lowest week of prices in more than a decade. A number of factors contributed to the drop. The Chinese economy and financial markets performed poorly this week, sparking fears that a slowdown will dampen demand. In the major markets of Europe and North America, a mild winter has lowered seasonal consumption of natural gas and heating oil. On the supply side, Iranian oil will soon be back on the global market, and OPEC signaled that it would continue to supply high volumes of oil. The United States, too, has managed to produce a significant amount of oil, despite increased financial pressure on many U.S. producers. All of this may well push prices into the $20 to $30 per barrel range.
Oil is the most geopolitically important commodity, and the ongoing structural shift in oil markets has produced clear-cut winners and losers. Between 2011 and 2014, major oil producers became accustomed to prices above $100 per barrel and set their budgets accordingly. For many of them, the past 18 months have been a period of slow attrition. And with no end in sight for low oil prices, their problems are going to only multiply. Each nation, though, has its own particular level of tolerance, and the following guidance highlights the key break points to monitor.
Former Soviet Union
Russia, Kazakhstan and Azerbaijan stand to lose the most among the countries of the former Soviet Union. As one of the world’s largest producers, Russia is the most important. Russia’s economy relies heavily on energy, and energy revenues constitute more than half the current budget. This budget, however, is calibrated to oil prices of $50 per barrel. As prices deviate further from this benchmark, Moscow has two funds totaling $131.5 billion to make up the discrepancy. But the margins are tight: Nearly half the amount on hand may be needed to cover 2016 budgetary shortfalls even if oil rises to $50 a barrel.
To remain afloat, the Russian government would have to drain both of these funds unless it cuts the state budget. Cuts would come with major tradeoffs. Moscow is embroiled in a standoff with the West, so slashing defense or security spending would be challenging. Russia will also hold critical parliamentary elections in September, so cutting social programs is not a good option either. Compounding this dilemma, Russian oil firms are in dire straits; although the government could restructure the tax system to provide them with relief, it would undermine government revenues. Moscow also has the option to privatize a large part of state-owned oil giant Rosneft this year to raise funds.
Both Kazakhstan and Azerbaijan face dilemmas similar to that of Russia. Kazakhstan’s budget is set at $40 a barrel, although it does have $55 billion in its national oil fund. An alternative budget is now being drawn up based on $20 a barrel, but such a change will almost certainly mean cuts in spending. Like Russia, Azerbaijan’s government set its budget based on $50 a barrel. Azerbaijan holds $51 billion in its state oil fund. Both countries are concerned with rising social tension over their weakening economies, although their governments have proved adept at cracking down on dissent. Kazakhstan plans to privatize state-owned companies and assets to raise money in 2016, though there has been little interest in the program among potential buyers.
Middle East and North Africa
Regionally, Algeria, Iraq and Iran, the oil-producing Gulf Cooperation Council states, will feel the most impact from low oil prices. For 2016 government budgets to break even, the International Monetary Fund projects that Saudi Arabia will need oil prices of $98.3 per barrel. Bahrain will need prices of $89.8 per barrel and Oman of $96.8. All are significantly higher than the break-even points of Kuwait, Qatar and the United Arab Emirates. For the most part, however, the Gulf Cooperation Council nations are in a position to weather low prices, since they hold low levels of debt and high financial reserves built up from years of high oil price revenues. Although Bahrain is an exception to this because it is not a major producer, Riyadh would sustain the country through a crisis to prevent spillover into Saudi Arabia’s Eastern Province.
In the short term, the Gulf Cooperation Council will not fall into financial crisis, but its member states are still making the financial adjustments needed to keep their reserves high and to avoid going deeper into debt. All of the Gulf nations will cut government spending in 2016 to some degree, albeit carefully, and will accelerate legal reforms. To ease the burden on citizens, Saudi Arabia and the United Arab Emirates are reducing fuel subsidies but maintaining spending on education and social services. Bahrain has reduced food subsidies but is considering cash handouts to balance the cuts. The United Arab Emirates, Saudi Arabia, Oman, Qatar and Kuwait are all discussing implementing taxes to increase state revenue, a measure unprecedented in the regional bloc.
Saudi Arabia is the most important country to watch. In addition to the careful cuts in social spending, the government has already started to privatize assets, starting with three major airports. Riyadh has even discussed floating a part of state-owned Saudi Arabian Oil Co., known as Saudi Aramco, in an initial public offering. Privatization will diversify the funding sources of these entities but also is politically risky. Deputy Crown Prince Mohammed bin Salman has hinted that reforms may be rapid, even as the king emphasizes the strength of the economy, but powerful members of the Saudi royal family will be wary of moving too swiftly. With dozens of privatization plans on the table, discontent within the ruling family is all but inevitable. Riyadh is also facing major regional changes with the return of Iran to the international economy and the enduring conflict in Yemen, meaning that defense and foreign spending will need to remain high.
Not all regional players have the fiscal advantage of the Gulf Cooperation Council. Algeria’s economy is highly dependent on natural gas, and its foreign reserves dropped precipitously in 2015 because of lower oil export revenue, leading to a $10.8 billion deficit. A mild winter in Europe, a key market for Algerian natural gas, will not help the situation. Algeria has sought to boost foreign investment through tax reform and the introduction of import and export license authorizations. But the country is heading toward a precarious political moment: the eventual death of President Abdelaziz Bouteflika, who has held office since 1999. The nation’s elite are now jockeying for position ahead of this transition; although continued reform measures are necessary, many will be wary of any that may erode their power. This will limit the country’s options, compounding the current crisis.
In Iraq, both Baghdad and the Kurdish capital of Arbil are already in serious financial trouble. The national government and the Kurdistan Regional Government need to maintain high levels of spending to fund their battle against the Islamic State. With oil revenues dropping, this means they will need to reduce other expenditures. The governments do have the option of renegotiating their contracts with international oil companies. Baghdad is in the midst of such talks to replace its current contract, which stipulates that Baghdad pay oil companies a fixed fee. Arbil is juggling its security situation with payments to international oil companies and the giant Kurdish civil service sector. The Kurds have already made it clear that they have no plans to export oil through Baghdad’s state-owned marketing company but will instead market it themselves and export through Turkey. Ankara and the Kurdistan Regional Government in Arbil will grow closer as both increase energy cooperation and deal with the mutual threat of the Islamic State. Arbil’s increased suffering under low oil prices will only strengthen this relationship.
Amid low oil prices, February elections are also approaching in Iran. Iranian President Hassan Rouhani will be banking that his talks with the West and success in negotiating the end of sanctions will help moderates and his traditional conservative allies defeat hard-line conservatives. The opposition has asserted that Rouhani’s economic policies are not working. Low oil prices will make these arguments only more credible. The end of sanctions will enable Iran to increase the volume of its exports, but with prices down nearly 70 percent since 2014 the revenue generated will not reach the level it would have two years ago. This realization may not become clear to voters until after February elections, meaning Rouhani could perform well. But by 2017, the discrepancy will likely be obvious, jeopardizing his chances for re-election in 2017.
Latin America
Oil-dependent and ailing Venezuela will suffer a great deal because of sustained low oil prices. Annual inflation is already at nearly 300 percent according to leaked central bank estimates. Inflation will mount and shortages will become even more extreme. Lower oil export revenues will reduce the country’s expenditures not accounted for in the budget, which in 2015 supplied much of the additional foreign currency needed to finance imports and foreign debt payments. Venezuela will likely need to decrease imports, and the country could even default on its foreign debt later in 2016. In the near term, the government, now with an opposition supermajority, will take what steps it can to address the economic situation. Currency devaluation and consumer price hikes would be the most effective remedy, but these would come with unacceptable political costs. Further unrest is inevitable, and the government will need to work to contain this from spreading too widely.
Brazil’s economy has already sustained a great deal of damage from the corruption scandal in state-owned energy firm Petrobras. Unless the government decides to curb the major criminal investigation into the company and associated officials, the scandal will continue to disrupt supply chains and contractor financing, further delaying existing projects. In response to the disruptions, Petrobras will need to further cut its investment plans, which will slow future foreign investment and energy production.
Ecuador’s oil exports plummeted by 30 percent in 2015 and will continue to be low through the next year. Quito has the option of imposing trade barriers to reduce imports and to compensate for lower export revenue, but this would compound the economic slowdown. The nation will hold a presidential election in February 2017, which could highlight eroding public approval for the ruling Alianza Pais coalition because of the declining economy.
North America
North America has, of course, been under the same low oil price pressure as the rest of the world. Nevertheless, production has been resilient in recent months, staying at around 9.2 million barrels per day since October. Production has the potential to fall again, however, as the oil hedges taken out against low oil prices in 2015 expire. The remaining 2016 hedges are mostly at a lower volume or price, a fact that will increase the burden on oil-producing companies. Across the continent, companies have drilled numerous new wells, but companies are holding off for higher prices before they complete the projects. This means that there is spare capacity that can react if prices make a sudden leap. As Iranian oil comes back on the market, if North American production remains high, it could exert more downward pressure on prices. Producers of heavy oil in Canada in particular are going to remain under more pressure as Western Canadian Select, the Canadian heavy oil benchmark, is already well below $20 per barrel.
Sub-Saharan Africa
The portion of Africa below the Sahara Desert is home to numerous small oil-producing countries that will feel the pinch of low oil prices to different degrees. The continent’s largest economy and oil producer, Nigeria, will be affected the most. Unlike producers in the former Soviet Union and in the Middle East, Nigeria has calibrated its budget using the rather realistic price of $38 per barrel. The problem is that even at this price point, the budget will run a deficit of $11 billion, 2.2 percent of GDP. Abuja will find it difficult to maintain its fuel subsidy programs and its currency peg to the U.S. dollar, put in place in June 2014 when the naira fell 25 percent. Since that time, the gap between the official and unofficial currency exchange rates has widened. Low oil prices will only make it wider. The new president, Muhammadu Buhari, has been clear that he does not support devaluation but will face pressure from various political interests and will likely need to cut spending.
Angola, Africa’s second-largest producer of crude oil, is under the same financial pressure as other world oil producers. The government, however, is quite stable. The ruling Popular Movement for the Liberation of Angola (MPLA) has tight control of the state security apparatus. Any threat would have to come from within the party itself. The government has based its 2016 budget on $48 per barrel oil prices and is continuing the large-scale austerity programs it began in 2015 in response to the initial drop at the end of the previous year. Angolan President Jose Eduardo dos Santos is now contemplating whether to step down in 2017. Power brokers within the ruling party are competing to become his successor, and low oil prices will make this competition more heated simply because there will be less money to pour into patronage networks.
Asia-Pacific
Most Asia-Pacific countries are net consumers of oil rather than net producers. This means that much of the region stands to benefit from low oil prices. However, there are two exceptions: Malaysia and Indonesia.
As one of the few net producers in the Asia-Pacific, Malaysia will feel the greatest pressure from cheap oil. Last year, roughly 20 percent of the Malaysian government budget came from the earnings of state-owned oil company Petronas. As the firm’s earnings declined, Kuala Lumpur was forced to impose an unpopular goods and services tax to make up for the shortfall. The government’s 2016 budget has Petronas contributing less than 12 percent of federal income. If oil prices continue to plunge, however, Malaysia will have to find new ways to raise money, either new taxes or pared-down services and subsidies. This will make the government unpopular at a time when Malaysian Prime Minister Najib Razak is mired in a corruption scandal involving the country’s sovereign wealth fund, 1Malaysia Development Berhad (1MDB). Since the political opposition in Malaysia is still incoherent, those who stand to gain from Razak’s declining public support are probably his rivals in the ruling United Malays National Organization.
To the south, Indonesia will find low oil prices to be a mixed blessing because the country is a net consumer of oil but a net producer of natural gas. Natural gas revenue will certainly drop, which will hit state and export revenue. But low oil prices will give current President Jokowi Widodo a chance to continue delaying unpopular gasoline and diesel subsidy cuts. When Jokowi came to office in 2014 he cut fuel subsidies, bringing domestic prices to international levels. But as prices rose during the course of the middle of 2015, he declined to raise consumer prices and instead had state-owned Pertamina sell imported products at a loss. Now, with prices still dropping, Jokowi may be able to avoid the issue of raising prices and instead may cut them.
Europe
Much like the Asia-Pacific region, low oil prices will be largely a boon for Europe because most countries are net oil consumers. Norway, the Continent’s main oil and natural gas producer, will not be so lucky. The country is in the middle of an economic slump due in no small part to a drop in oil-related investment and activities in Norway. According to the International Monetary Fund, Norway’s GDP growth fell to 0.8 percent in 2015, down from 2.2 percent the year prior. Over the same period, unemployment grew from 3.5 percent in 2014 to 4.2 percent in 2015; this figure is expected to rise even further in 2016. Though the Organization for Economic Co-operation and Development projects a gradual economic recovery for Norway in the next two years, the trajectory of oil prices could impede this.
In the long run, low oil prices could also cause problems across the Continent as a whole. Presently, they are improving Europe’s economic climate; this could lead Europeans to believe that they are witnessing a “real” recovery when in fact a sizable share of the progress is caused by external factors. This misperception could play a particularly significant role in Southern Europe, where governments are beginning to slow reform efforts. Additionally, reduced oil prices could work against the European Central Bank’s attempts to create inflation in the eurozone in the hope of boosting economic growth in the bloc.
“Who Wins and Who Loses in a World of Cheap Oil”
is republished with permission of Stratfor.
————————————————-
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- Lower oil prices are shaking the world.
- Prepare now, for oil prices will rise again.
- Stratfor: how the Iran deal will change the long-term price of oil.
- Important: The first financial world war has begun, over oil. Bet on the Saudi Princes to win.
Im curious, what degree of influence do you think US interests (eg banking, major oil corps, weapons industries ect) have on the Sauds decision to engage in this financial oil war?
Romer,
That’s a great question. I’d like to know the answer. My guess: zero.
Low oil prices will devastate those nations dependent on oil revenue and provide small benefits to those that consume oil.
Small benefits?
Already I’m benefitting from the decrease in the price of diesel – last time I filled up I paid less than £1 per litre for the first time in several years, this decrease will benefit me and my wife by some pounds per week, and there are millions of other drivers in Great Britain alone who will also benefit.
The price of oil affects the price of practically everything, all goods – the factory gate prices of which are dependent in the case of metals especially, as are fertilisers, on the price of energy – have to be transported from their source to the point of sale, generally by vehicles burning diesel, so the price of food will also drop – it is in fact observably doing so already, as can be observed by our weekly shopping bills.
The price of natural gas is dropping too, I fully expect this will be reflected by a reduction in my electricity and gas bills.
So the benefits for millions – billions? – of us little people – especially the very poor in this country, many thousands of whom die prematurely every winter because they are unable to afford sufficient heat and food to survive – certainly don’t appear small, I can’t comment on how they will affect such as the Saudi royals or the Russian oligarchs, however. Perhaps they’ll have to re-evaluate their priorities for once.
So maybe this happy state of affairs won’t last indefinitely, but while it does, I and many others will make the most of it.
Then there’s the effect that the prospect of ever-decreasing – in the short to medium term at any rate – fossil energy will have on the massively over-subsidised ‘unreliables’ industry, anything that hits those parasites where it hurts can only be a good thing.
“Small” benefits in a macro sense. Small to individuals and most businesses; small to the overall economy.
Petroleum fuel is aprox 5% of the CPI. The retail price of gasoline decreased $0.19 in 2015; diesel is down ~30%. The net effect is small to most households.
http://www.bls.gov/cpi/cpiri_2014.pdf
http://www.eia.gov/petroleum/gasdiesel/
Petroleum is used in many products other than transportation services, but is a trivial weight in their prices to the end user (peak oil activists, where they were listened to, would make up absurdly large numbers about this).
I don’t know what the rest of your comment is attempting to say. It doesn’t make much sense to me.
“The net effect is small to most households.”
I disagree. Everyone with whom I have discussed the price of fuel has welcomed the decrease in their transport costs as a welcome respite from ever-rising prices. Mind you, I live in the country, so transport is a major expense.
Perhaps you are not actually representative of ‘most households’, not ones in Great Britain at any rate.
“I don’t know what the rest of your comment is attempting to say. It doesn’t make much sense to me.”
How patronising.
As Steven Mosher would say – ‘Read Harder’.
Cat,
When someone shows data — the CPI weights and doe price data — saying what you think most people believe is an absurd rebuttal.
Here’s what the New York Times has to say about the benefits.
Who benefits from the price drop?
Any motorist can tell you that gasoline prices have dropped. Diesel, heating oil and natural gas prices have also fallen sharply. Households are likely to spend $750 less on gas this year because of the oil prices, the United States Energy Information Administration said in January. Europeans and consumers around the world will enjoy similar benefits.
The latest drop in energy prices — regular gas nationally now averages around $2.03 a gallon, down about 19 cents from a year ago — is also disproportionately helping lower-income groups, because fuel costs eat up a larger share of their more limited earnings.
Gasoline prices are now inching down as refineries finish their maintenance to switch to more inexpensive winter gasoline blends.
http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0
So that’s $750 per household in the USA – how many households is that? Then reflect this on the rest of the World that are users of transport fuel. After that factor in the cost to the various industries that are dependent on large energy inputs for their production, BMW for example have moved their carbon fibre plant – essential for their next generation vehicles – to the USA purely on the strength of the price of both energy and the natural gas that is the feedstock for the CF, and are also in the course of moving their metal foundries particularly aluminium – to the USA too. Nor are they by any means the only large company to do so, Germany is very close to having no steel manufacturers, that should give anyone with even the slightest economic background cause for thought. Great Britain has already lost its aluminium extraction industry to the Middle East and India – the loss of a strategic industry that we will seriously regret in the not too distant future.
See also this “is also disproportionately helping lower-income groups, because fuel costs eat up a larger share of their more limited earnings.
So I stand by my observation that to write off the benefits of a substantial drop in the price of oil are “small” indicates a very narrow World view.
Further, I very clearly remember the large negative impact of the massive increase in oil prices in the 1970s, so notwithstanding the CPI weights and doe price data, I consider an assertion that the effects of a substantial reduction in oil prices on oil consumers can be considered trivial to be at best exceptionally disingenuous, especially as I cannot see you have produced any significant justification for such a statement.
The “save $750 in 2015” is from an email from the EIA head sent in January 2015. It was a forecast. The Times did not give additional information, or current estimates.
The US economy is large. Prices go up and down. Looking at individual price changes as stimulus or depressants does not tell us much. Overall inflation was ~.4% (of the PCE).
The US economy grew about 2% in 2015, probably less. If you think that was a big deal — showing the big stimulus of falling oil prices, ok.
You are wasting a lot of your time on this trivial point.
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Assuming purely economic motives and assuming commonly referenced reserve and extraction costs in the KSA one is tempted to conclude they think their oil is worth more now than later. But why?
I wonder if they feel that the world is at peak consumption levels and that contrary to peak oil fears they know there are plenty of mid cost competitors who will rise if given the chance (shale, Russia, maybe even Venezuela). Under that view it would make sense to pump all out grab market share and take whatever the market will give.
Playing that geological trump card would certainly upend oil market logic and shake all more costly producers to the ground not to mention new E&P activity.
This is really the opposite of the peak oil view, that the global economy will reach peak consumption rather than peak oil. But there is a strong trend towards electrification and efficiency gains and reduced energy intensities in all developed western economies. Also developing countries may not be as oil hungry nor need to be. Renewables though not viewed insignificant now are becoming more viable and if trends continue could become significant.
I’m reading tea leaves I know but sometimes it’s useful to take a WAG and see if any of the logic holds up to reason.
Roamer,
The Saudi Princes are applying the ancient tactic of using one’s lower cost of business to drive out competitors, after which they can raise prices. That works given the long life of their reserves. That we have such difficulty seeing this is interesting. Perhaps we have come to assume everybody plays by our rules.
See details here: http://fabiusmaximus.com/2015/12/08/saudi-arabia-oil-war-91758/
I don’t have a problem seeing that the Sauds are trying to drive out competitors and regain market control. And if the commonly stated reserves and extraction costs are correct they will succeed. But one still needs to explain why they think that is a better financial tactic than selling less oil for more money and presumably make more total on their reserves. its unlikely they will get to raise prices very long before challengers come back in this war. Assuming oil prices near cost of marginal barrell they’d be better taking smaller market share for more money over longer period.
So I’m hypothesizing that logic has broke down and we are peaking in oil consumption and the Sauds know it. So they will cash in as much volume from their reserves as possible over the coming decades. Regardless if that’s true I think you are right that this is an oil war, the Sauds will win and at the end of it the economic and geopolitical affects will be profound.
Roamer,
” But one still needs to explain why they think that is a better financial tactic than selling less oil for more money and presumably make more total on their reserves.”
Because after they destroy many of their competitors an re-establsh discipline in OPEC, they will raise prices by cutting production (taking off 3 or 4 million b/d from the market). So they will be selling much less oil for 2x or 3x current prices. Worked before. Will work again, probably.
FM, But even with current crop of frackers gone the rigs tech and plays all still exist. One year and 1500 active rigs would put a hell of a dent in that strategy. You could argue the banks won’t finance that again but it could be hungry majors who take one shale 2.0 and if anything they’d be more successful than the first wave.
They’d probably have to buy out the frackers to succeed. Maybe that’s part of the going public strategy.
roamer,
You are unclear how oil capex works. There have been scores of boom-bust cycles in oil since a well blew at Spindeltop in 1901. There’s no need to guess how they work.
“This misperception could play a particularly significant role in Southern Europe, ”
I’m live in Italy. here rouling party say again and again and again that this is a real recovery, thanks to the very good work mr Renzi and supporter have done in the country in the last two years. Hoping that this is only public relation position (even if we don’t have scheduled general election to 2018, there are local election in a lot of mayor city and referendum on the costitutional reforms this year) i check 4 MPs, with a long time friendship with me, close supporter of Mr Renzi. 3 say this is REAL recovery, without doubt . the last say that this is REAL recovery, with external factors have no effect, but maybe external factors can stop the recovery.
on the price of oil: for households in a lots of EU country, the effect is lower due to tax on gasoline: here in Italy,as one example, around 75% of price are tax: now we pay 0.80 tax on 1.2 euro litre final price
ps: sorry from my english, i read as italian but rarely i have to write. i hope you have good dectription skills.
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FM, Yes I am unclear about how oil CAPEX works. Presumably you are talking about the long budget times to allocate capital to bringing oil projects online, which is true for the Sauds conventional competitors.
But my understanding is that shale plays and cost curves are well known and timelines to bring to production are fast creating a swing producer dynamic. Yes most of current shale players are going to be bankrupt soon, but the good ones will survive and have cheap assets with little e&p work to do. They’ll limp along working the best of the sweet spots and then floor it when prices rise with existing DUCs and new and improved completion tech. and reduced drilling costs. Beacause of that threat the Sauds won’t regain OPEC control, the best they can do is pump wide out maximize volume and keep prices just below shale trigger points. They could do that for the foreseeable future, but that certainly isn’t a repeat of a strong OPEC scenario.
FM,
I have a moderately good understanding of how oil CAPEX works and I understand the point you are making but the Saudi strategy still does not make a lot of sense to me.
1) I do not know the extent of the Saudi oil reserves but they were buying a lot more equipment last decade that allows them to extend the life of their wells than equipment to drill new wells. This suggests that they have already hit peak production and have maybe another 30-40 years before they run out of the easily accessible, easily refined crude that brings in most of their revenue. I do not know how much of the lower grades they might be able to tap.
2) So far the US drillers have shown a surprising capacity to cut costs and absorb losses. Admittedly, they seem to be reaching the end of that capacity, but the data so far indicates that in anything short of a full-blown recession, they would be able to raise the capital to restart their wells in a relatively short period if the price of oil rose dramatically. The US is NOT short on capital, quite the opposite, we’ve a very large excess of capital looking for profitable places to invest. If oil were to jump to $140 per barrel, the US oil industry would suddenly have access to tens of billions of start-up capital.
3) The Saudi strategy has badly damaged their relationships with other OPEC countries. It would be extremely hard for the Saudis to persuade any OPEC member to immediately cut production or agree to a lasting quota structure because too many OPEC members have had their reserves cut too deeply.
4) The Saudi strategy has been poorly timed (not really their fault) and has come during a time when oil demand is soft. This means that it will take longer for the price of oil to recover even after the Russian and US oil producers have finally capitulated and will buy more time for the US oil producers to recapitalize and start drilling again. On the other hand, it has also softened the blow of the global economic slowdown so we should all be thanking the Saudis, which I doubt they would appreciate.
All in all, I see the Saudi strategy as a reasonable attempt to regain control over the price of oil based on history but the combination of tenacity on the part of Russian and US producers, the global economic slowdown, and the inherent leakiness of the OPEC membership when it comes to quotas is making this a poor choice.
Perhaps a better strategy for the Saudis is to look for a different economic model all together. They have enjoyed dominance in the oil production world since the 1930s but some day that dominance will end. Saudi oil will run out (and production costs are rising regardless of how soon the oil runs out) or new energy sources will come on line or other countries will develop previously unexplored oil fields with lower production costs are some common scenarios about how the end will come. But the important question is: What will the Saudis do then?
I suspect the answer is that they will suffer for their current foolish choices.
Pluto,
My guess is the Saudi Princes have a clearer understanding of oil dynamics than you. So I suggest caution about labeling their decisions “foolish choices”. Confidence is good only in moderation.
Also, most of your analysis is probably wrong. Really really wrong. I’ve discussed most of those points in previous posts. Time will tell who is correct.