Why The Saudis Actually Like It When The Price Of Oil

Plummets
Riyadh - OPEC's biggest crude producer Saudi Arabia will have a crucial
cartel meeting to debate possible output cuts on Thursday.
Analysts say the kingdom is content to see shale oil producers suffer from low
prices and will resist pressure to reduce output and shore up the cost of oil.
A barrel of crude has plunged by about one third in value since June to
around $80 in an increasingly competitive market. Saudi Oil Minister Ali alNaimi was silent about his government's intentions Monday as he arrived in
Vienna ahead of the OPEC gathering. Analysts say the kingdom is strong
enough to withstand lower prices.
"Saudi Arabia wants to try and knock out shale oil competitors from the
market," said Saudi economist "They have the fiscal strength to remain
steadfast for two to three years," he told AFP.
"Is this the first time we have oversupply?" he was quoted as saying by Dow
Jones Newswires when questioned about current supply and demand.
However his Iraqi counterpart Abdel Mahdi arrived in Vienna pushing for
action, deeming the steep price drop "not acceptable".
Oil prices have collapsed to four-year lows on factors including dampening
demand in a sluggish world economy, a sharp rise in output from shale oil and
other unconventional sources, and a strong dollar.
- Oil prices fall further Global oil prices fell Monday amid skepticism that OPEC would move
aggressively to lift prices.
US benchmark West Texas Intermediate crude for January delivery dipped 73
cents to $75.78 a barrel on the New York Mercantile Exchange.
Although Saudi Arabia and its Gulf neighbours the United Arab Emirates and
Kuwait could bear the burden of lower production, "I don't think they will cut
because they will lose their market share," said Fahad Alturki, chief economist
and head of research at Jadwa Investment in the Saudi capital.
Figures from the US Energy Information Administration showed Saudi exports
to the US dropped by almost from 1.25 million barrels per day in July to below
900,000 bpd in August, although it remains the second largest US supplier

after Canada.
The kingdom then cut its prices for crude sold to the US market, sending
global prices plummeting in early November by almost $2.
- Defending US market share Analysts saw the Saudi move as an effort to hold onto North American market
share against cheaper oil from US shale fields.
Saudi Arabia also raised prices for its oil sold to Asia and other areas but was
apparently "concentrating more on defending its market share in the US",
The kingdom exports two-thirds of its crude to Asia but this year has seen its
market share fall in China and India
OPEC pumped 30.6 million bpd last month, above its 30 million bpd target,
according to the International Energy Agency which advises member
countries on energy policy.
Of that total, Saudi Arabia produced around 9.6 million bpd in October,
according to data cited by OPEC.
Some analysts expect OPEC's 12 members to retain the 30 million bpd ceiling
in Vienna.
- Saudi 'is happy' "I think the only beneficiaries of an oil cut would be the shale oil producers
who are now losing money as the prices are becoming lower than their
marginal cost," Alturki said.
Technological innovations have unlocked shale resources in North America
and raised daily US oil output by more than 40 percent since 2006, but at a
production cost which can be three or four times that of extracting Middle
Eastern oil.
He said the kingdom doesn't need to make major production cuts because
continuing lower prices will push shale producers out of the market, reduce
excess supply and raise prices.
British-based analysts said Saudi Arabia is "in a much stronger position"
economically than many other OPEC members, and is likely to resist pressure
to lower its output.
"Over the longer-term, Saudi Arabia may see a period of lower oil prices as

working in its favour," boosting oil demand, they said.

"In addition, it may cause problems for the shale industry in the US and the
Saudis are probably content seeing the less-friendly oil producers in the
Middle East, notably Iran, coming under pressure," the analysts said in a
briefing paper.

Are the U.S. and Saudi Arabia

conspiring to keep oil prices low?
There are a number of factors behind the continuing global slide in
oil prices, including North American production, increased energy
efficiency, Europe's economic stagnation, and China's slowing
growth. But a big one is Saudi Arabia, which, to the dismay of
fellow oil-producing nations, has resisted pressure to cut
production in order to stabilize prices.
Cheaper oil's winners and losers
Ahead of an OPEC meeting in Vienna next week, there are some
contradictory theories about why Saudi Arabia is content to keep
oil cheap for the time being.
One is that the Saudis want to nip the U.S. oil boom in the
bud.
o American shale oil is more expensive to produce and
needs high prices to remain competitive.
o Kingdom cut prices for U.S. customers earlier this
month, "the Saudis have basically declared war on the
U.S. oil producers."
But there's a competing narrative that the Saudis are waging
war in cooperation with the United States, against their
mutual enemies Russia and Iran.
"Saudi Arabia, which intends to manage OPEC, serves the
interests of the G20 group,"
"What is the reason for the United States and some U.S.
allies wanting to drive down the price of oil? To harm
Russia."
The U.S.-Saudi oil alliance is basically taken as a given in the

Iranian and Russian media.

Saudi Arabia may indeed want to punish Russia for its
support of Assad's government, and will take any leverage it
can get over regional archrival Iran. The U.S., meanwhile,
wants to punish Russia for its actions in Ukraine and to
pressure Iran into agreeing to a nuclear deal.
To be clear, there's no proof of any deal, and Saudi Arabia denies
its policies are motivated by geopolitical interests. Moreover, U.S.Saudi relations aren't at their best at the moment, and the kingdom
is extremely skeptical of America's latest opening to Iran. But even
if there isn't explicit collusion going on, Saudi Arabia's move
certainly benefits some key U.S. foreign policy interests
For the sake of argument, let's assume that the conspiracy theory is
real, and that there is an agreement in place between the U.S. and
Saudi Arabia to keep oil prices down. Is it working?
Low oil prices are having an impact on both the Russian and
Iranian economies.
In Russia's, the impact is probably greater than that of the
recently imposed Western sanctions.
if economic performance were a reliable guide to the future
prospects of authoritarian governments, Zimbabwe's Robert
Mugabe and North Korea's Kim family would have been
deposed by angry mobs decades ago.
the dire (bad) state of the Russian economy doesn't appear to
be having much of an effect on Vladimir Putin's popularity,
and actions that anger the West only seem to make his
position stronger at home.
In Iran, the situation is a little murkier.
Some experts estimate the country needs $140-a-barrel oil to
balance its budget.
The price is currently about $80 per barrel.
The Islamic Republic's economic distress is likely one reason
why President Hassan Rouhani's government has been more
cooperative on the nuclear issue.

 The government can't do much about oil prices, but better

relations with the West could bring sanctions relief and
investment.
The oil war may be making life difficult for these countries, then,
but there's no guarantee it will change the behavior of their
regimes.
On the other hand, there is one regime whose behavior is likely
being affected by the world of cheap oil. Senate Democrats
narrowly defeated the Keystone XL pipeline on Tuesday, in part
because President Barack Obama was expected to veto it even if it
did pass. He likely feels more comfortable about that stance than
he would if oil were priced at more than $100 a barrel right now.

SaudiArabiawillnotcutoilproduction
NEWYORK(CNNMoney)

Thenear$50dropinoilpricessinceJunehasledtorampant
speculationaboutSaudiArabia'smasterplan.

Astheworld'sbiggestproducerofcrudeoil,SaudiArabiahasalotof
influenceonprices.
OnetheoryisthattheSaudisareintentionallycrashingoilmarkets
toundermineIran.
SaudiArabiaisonceagainusingoilasaweapontoweakenits
politicalrivals.
ThehealthoftheSaudieconomyandsomewouldargue,the
viabilityoftheSaudistateitselfremainsextremelydependenton
oil.
oilproceedscontinuetoaccountfor90%ofexportearnings,
approximately80%percentofgovernmentrevenuesandabout
40%ofGDP.
Despitenumerousinitiativesandbillionsofdollarsspentonefforts
todiversifytheSaudieconomy

Thepriceisnotrightformanyoilrichnations.

Oilissellingforroughly$83abarrel(Oct,2014)onthe
globalmarket.That'sbadnewsforIran,Nigeria,
Venezuela,Russia,andSaudiArabia,amongothers.They

needittotradeatfarloftierlevelsinordertobalancetheir
budgets.
Budgetofcountries:
Iran,builtonoilat$135dollarsperbarrel
Russiahasoilbudgetedat$100
SaudiArabiawillbreakevenat$95perbarrel.
"Alltheoilproducersarefeelingit(thelowoilprices
meanlessprofit).Nowthequestioniswhocanwithstand
itthemost,"
Oilwilltumbleto$70saysnew'bondking'
Drillordie:
energyproducingnationswillcontinuetopumpup
productionbecausetheydon'twanttorisklosingmarket
share.
Astaringcontestofwhocanlastthelongestsellingoil
belowtheirbudgetpoint.Whoevercanholdoutlongestis
goingtowin,"hesaid."They'reeatingateachother."

Inthepast,theOPECwouldhavelikelysteppedinbythispoint
tourgeitsmemberstocutproduction,buttheoilcartelhasbeen
doggedbyinternaldiplomaticdisputesandshiftingpolitical
allegiances.

Geopoliticalfallout:Thepersistentlylowoilpricescould
changethegeopoliticalcalculationsforsomenationsthatare
alreadydealingwithsanctionsovertheirconfrontationswiththe
West.
thedepressedpricesmightbringRussiatothenegotiating
tableoveritsactionsinUkraine.
Iran,thecountry'seconomyhasbeencrippledbysanctions
overitsnuclearprogram.
There'sspeculationthatSaudiArabiaisrefusingtocutsupplyin
ordertosqueezeIran.
Related:SaudiArabia:Thenextbigemergingmarket?
Budgetsqueeze:Lowoilpricesmayforcesomegovernments
tomaketoughcuts.
Venezuela
heavilysubsidizesthecostofgasoline.Agallonusually
costsaroundsevencents.
Alreadyfacingdecliningoilproduction,skyrocketing
inflation,anddwindlingforeignexchangereserves,the
socialistgovernmentmaybeforcedtolookatitsbudgetto
seewhatitcancutwithoutroilingthepublic.
Russia:
financeministerisalreadytalkingabouttheneedtocut
spendingby10%.
Buyingtime:Russia
isstillsittingonahealthychunkofforeignexchange
reserves,whichitcandipintotohelpbuytimeasoil
remainslow.
Atcurrentlevel,Russiacancoveritsbudgetforfouryears
SaudiArabiahasabouteightyears.
Nigeria,canonlysustainthecurrentsituationforafew
months.
Americanenergygamechanger:Thebiggestshiftinglobal
energymarketsisthattheU.S.isproducinganunprecedented
amountofoilnow.EventhoughAmericahasabanonexporting

crude,thefactthatit'simportinglesshasledtoafloodof
foreignoilontheglobalmarket,
Related:IstheU.S.holdingtoomuchoilinreserve?
"Itreducesourrelianceontheproductioninunstableareas.It's
minimizingtheimpactthattheseMiddleEasterncountriesare
havingonglobalaffairs,"hesaid."Thisisgoodnewsforallof
us."

Saudi'soilwoes:
TheSaudigovernmentownsallnaturalresourcesinthecountry,
includingoil,andusestheirsalestomaintainitssocialcontract
withSaudicitizens,manyofwhomhavecometoexpectfreeor
heavilysubsidizededucation,healthcare,housingaswellas
governmentemploymentinreturnfortheirpoliticalacquiescence.
TheSaudiMinistryofFinanceannouncedits2015budgetwithan
expectedadeficitof$39billion,thelargestinthecountry'shistory.
Thebudgetandfallingoilpriceshavedominatedbothtraditional
andsocialSaudimedia.
ThegovernmentisthelargestemployerinSaudiArabia.Whilethe
Arabspringhaslargelyfadedfromthecollectivememoryof
Saudismanyofwhomnowassociateitwithinstabilityand
violenceitwasnotacoincidencethattheSaudigovernment
announceda$130billionspendingboostonnewhousing,
education,healthcareandjobcreationin2011.
largesegmentsoftheyoungandincreasinglybettereducatedSaudi
populationnowroutinelyexpresstheirfrustrationovertheir
economicwellbeingonsocialmedia.
Related:WillSaudiArabiacutoilproduction?
SaudiArabiawouldn'triskdisturbingthisdelicatedomestic
balancingacttoundermineIran.
Intentionallycuttingtheoilpriceinhalfistheequivalentofaself
inflictedgunshottotheheadforSaudiArabia.Thecurrentoil
"crash"haslittletodowiththeSaudisplayingpoliticsand
everythingtodowithmarketfundamentals.
Weareexperiencingbasiceconomics:Anincreaseinglobalsupplies
largelyduetoincreasedshaleproductionintheUnitedStateshasbeen
combinedwithlowerglobaldemandaseconomiesinEuropecontinueto
sputterandAsiangrowth.Thisisthemaindriveroftheoilprice

meltdown.
Whileit'struethatSaudiArabiausedoilasaweaponinthepast,itwas
hardlyagreatsuccess.
Related:ThestoryofAmericanoil
SomearguetheSaudiorchestratedoilembargoagainsttheUnited
States
theincreaseinoilpriceslargelyduetoproductioncutsbyOPEC
strainedrelationsbetweenoilproducersandconsumers,
promptingthelattertoissuecallsforenergyindependence.
TheSaudisarealsounlikelytoforgethowIraq'sSaddamHussein
invadedKuwaitinAugust1990,duetoSaddam'sperceptionthat
theyweretryingtocripplehiseconomybyplayingpoliticswith
oil.
WhilethechancesofamilitaryconfrontationbetweenSaudiArabiaand
Iranoveroilareextremelyremote,Iran'sPresidentrecentlyattributedthe
dropinpricestoa"conspiracyagainsttheinterestsoftheregion,the
MuslimpeopleandtheMuslimworld."
RecentreportsindicatethatSaudiOilMinisterAliAlNaimiactually
triedtobroachthesubjectofabroadsupplycutwithsomemajoroil
producersjustpriortoOPEC'smeetinginNovemberbutwasrebuffed.
Related:You'resaving$550gas.Shouldyousaveorspendit?
IfthisoilcrashisaboutcurtailingIran'sinfluenceintheregion,whynot
implementthispolicytwoyearsago,topreventIranandRussiafrom
tippingthescaleinfavorofBasharalAssadinhiswarwiththerebels,
forwhomSaudiArabiahasexpresseditsfullsupport?
Hadtheydonesothen,theSaudiswouldhavealsoweakenedanotherally
ofIran's,Iraq'sPrimeMinister,NouriAlMaliki,whomtheSaudis
viewedasapolarizingfigurewhosemarginalizationofIraq'sSunni
minoritycreatedthefertilegroundinwhichthemilitantgroup,theso
calledIslamicState,hasthrived.
ThoseadvancingthetheorythatSaudiArabiaisslashingoilpricestohurt
IranarewoefullyunderestimatingtheimportanceofoiltotheSaudi
economyandtothewaytheSaudistatesustainsitself.

Falling oil prices: Who are the

winners and losers?
Business reporter, BBC News

Global oil prices have fallen sharply over the past seven months,
leading to significant revenue shortfalls in many energy exporting
nations, while consumers in many importing countries are likely to have
to pay less to heat their homes or drive their cars.
From 2010 until mid-2014, world oil prices had been fairly stable, at around
$110 a barrel. But since June prices have more than halved. Brent crude oil
has now dipped below $50 a barrel for the first time since May 2009 and US
crude is down to below $48 a barrel.
The reasons for this change are twofold - weak demand in many countries
due to insipid economic growth, coupled with surging US production.
Added to this is the fact that the oil cartel Opec is determined not to cut
production as a way to prop up prices.
So who are some of the winners and losers?

Russia: Propping up the rouble

Russia is one of the world's largest oil producers, and its dramatic interest
rate hike to 17% in support of its troubled rouble underscores how heavily
its economy depends on energy revenues, with oil and gas accounting for
70% of export incomes.

US Dollar v Russian Rouble

Russia loses about $2bn in revenues for every dollar fall in the oil price, and
the World Bank has warned that Russia's economy would shrink by at least
0.7% in 2015 if oil prices do not recover.
Despite this, Russia has confirmed it will not cut production to shore up oil
prices.

"If we cut, the importer countries will increase their production and this will
mean a loss of our niche market," said Energy Minister Alexander Novak.
Falling oil prices, coupled with western sanctions over Russia's support for
separatists in eastern Ukraine have hit the country hard.
The government has cut its growth forecast for 2015, predicting that the
economy will sink into recession.
Former finance minister, Alexei Kudrin, said the currency's fall was not just a
reaction to lower oil prices and western sanctions, "but also [a show of]
distrust to the economic policies of the government".
Given the pressures facing Moscow now, some economists expect further
measures to shore up the currency.
"We think capital controls as a policy measure cannot be off the table now,"
said Luis Costa, a senior analyst at Citi.
Russia's economy is forecast to fall into recession in 2015 if oil prices do not
regain ground
While President Putin is not using the word "crisis", Prime Minister Dmitry
Medvedev has been more forthright on Russia's economic problems.
"Frankly, we, strictly speaking, have not fully recovered from the crisis of
2008," he said in a recent interview.
Because of the twin impact of falling oil prices and sanctions, he said the
government had had to cut spending. "We had to abandon a number of
programmes and make certain sacrifices."
Russia's interest rate rise may also bring its own problems, as high rates can
choke economic growth by making it harder for businesses to borrow and
spend.

Venezuela: No subsidy cuts

Venezuela saw mass anti-government protests earlier this year
Venezuela is one of the world's largest oil exporters, but thanks to economic
mismanagement it was already finding it difficult to pay its way even before
the oil price started falling.
Inflation is running at about 60% and the economy is teetering on the brink of
recession. The need for spending cuts is clear, but the government faces
difficult choices.
The country already has some of the world's cheapest petrol prices - fuel
subsidies cost Caracas about $12.5bn a year - but President Maduro has

ruled out subsidy cuts and higher petrol prices.

"I've considered as head of state, that the moment has not arrived," he said.
"There's no rush, we're not going to throw more gasoline on the fire that
already exists with speculation and induced inflation."
The government's caution is understandable. A petrol price rise in 1989 saw
widespread riots that left hundreds dead.

Saudi Arabia: Price versus market share

Saudi Arabia is not expected to cut production to prop up oil prices in the short
term
Saudi Arabia, the world's largest oil exporter and Opec's most influential
member, could support global oil prices by cutting back its own production, but
there is little sign it wants to do this.
There could be two reasons - to try to instil some discipline among fellow
Opec oil producers, and perhaps to put the US's burgeoning shale oil and gas
industry under pressure.
Although Saudi Arabia needs oil prices to be around $85 in the longer term, it
has deep pockets with a reserve fund of some $700bn - so can withstand
lower prices for some time.
"In terms of production and pricing of oil by Middle East producers, they are
beginning to recognise the challenge of US production," says Robin Mills,
Manaar Energy's head of consulting.
If a period of lower prices were to force some higher cost producers to shut
down, then Riyadh might hope to pick up market share in the longer run.
However, there is also recent history behind Riyadh's unwillingness to cut
production. In the 1980s the country did cut production significantly in a bid to
boost prices, but it had little effect and it also badly affected the Saudi
economy.

Opec: Not all are equal

Some Opec members need oil to be above $120 a barrel to avoid hard
spending choices
Alongside Saudi Arabia, Gulf producers such as the United Arab Emirates and
Kuwait have also amassed considerable foreign currency reserves, which
means that they could run deficits for several years if necessary.
Other Opec members such as Iran, Iraq and Nigeria, with greater domestic
budgetary demands because of their large population sizes in relation to their
oil revenues, have less room for manoeuvre.

They have combined foreign currency reserves of less than $200bn, and are
already under pressure from increased US competition.
Nigeria, which is Africa's biggest oil producer, has seen growth in the rest of
its economy but despite this it remains heavily oil-dependent. Energy sales
account for up to 80% of all government revenue and more than 90% of the
country's exports.
The war in Syria and Iraq has also seen Isis, or Islamic State, capturing oil
wells. It is estimated it is making about $3m a day through black market sales
- and undercutting market prices by selling at a significant discount - around
$30-60 a barrel.

United States: Fracking boom

US domestic oil production has boomed due to fracking
"The growth of oil production in North America, particularly in the US, has
been staggering," says Columbia University's Jason Bordoff.
Speaking to BBC World Service's World Business Report, he said that US oil
production levels were at their highest in almost 30 years.
It has been this growth in US energy production, where gas and oil is
extracted from shale formations using hydraulic fracturing or fracking, that has
been one of the main drivers of lower oil prices.

"Shale has essentially severed the linkage between geopolitical turmoil in the
Middle East, and oil price and equities," says Seth Kleinman, head of energy
strategy at Citi.
Even though many US shale oil producers have far higher costs than
conventional rivals, many need to carry on pumping to generate at least some
revenue stream to pay off debts and other costs.

Europe and Asia: Mixed blessings

Growth in the European Union remains weak
With Europe's flagging economies characterised by low inflation and weak
growth, any benefits of lower prices would be welcomed by beleaguered
governments.
A 10% fall in oil prices should lead to a 0.1% increase in economic output, say
some. In general consumers benefit through lower energy prices, but
eventually low oil prices do erode the conditions that brought them about.
China, which is set to become the largest net importer of oil, should gain from
falling prices. However, lower oil prices won't fully offset the far wider effects
of a slowing economy.
Japan imports nearly all of the oil it uses. But lower prices are a mixed
blessing because high energy prices had helped to push inflation higher,
which has been a key part of Japanese Prime Minister Shinzo Abe's growth
strategy to combat deflation.
India imports 75% of its oil, and analysts say falling oil prices will ease its
current account deficit. At the same time, the cost of India's fuel subsidies
could fall by $2.5bn this year - but only if oil prices stay low.

OPEC'ssurprisingresponse:Let
priceskeepfalling

ThatbringsustoOPEC,acollectionofoilproducingnations
thatpumpsoutabout40percentoftheworld'soil.Inthepast,
thiscartelhassometimestriedtoinfluencethepriceofoilby
coordinatingeithertocutbackorboostproduction.
AtitsbigmeetinginViennaonNovember27,therewasalotof

heateddebateamongOPECmembersabouthowbesttorespond
tothedropinoilprices.Somecountries,likeVenezuelaand
Iran,wantedthecartel(mainlySaudiArabia)tocutbackon
productioninordertopropuptheprice.Thesecountriesneed
highpricesinorderto"breakeven"ontheirbudgetsandpayfor
allthegovernmentspendingthey'verackedup:

OntheothersideofthedebatewasSaudiArabia,the
world'ssecondlargestcrudeoilproducer,whichwas
opposedtocuttingproductionandseemedwillingtolet
priceskeepdropping.
Whywasthat?Forone,officialsinSaudiArabiaremember
whathappenedinthe1980s,whenpricesfellandthe
countrytriedtocutbackonproductiontopropthemup.The
resultwasthatpriceskeptdeclininganywayandSaudi
Arabiasimplylostmarketshare.What'smore,the
Saudishavesignaledthattheycanlivewithlowerpricesin

theshortterm.(Thegovernmenthasbuiltup$750billionin
foreignexchangereservestofinancedeficits.)

SAUDIARABIAWASINFAVOROF
LETTINGPRICESCONTINUETOFALL

Intheend,OPECcouldn'tagreeonaresponseandendedup
keepingproductionunchanged.
"Wewillproduce30millionbarrelsadayforthenext6months,
andwewillwatchtoseehowthemarketbehaves,"saidOPEC
SecretaryGeneralAbdallaElBadriafterthemeeting.
Thatcausedthepriceofoiltostartcrashingevenfurther.The
priceofBrentcrudewentfrom$80perbarrelto$70perbarrel
injustafewdays.Anditkepttumblingtodownbelow$60per
barrelbymidDecemberand$50byJanuary.
Forallintentsandpurposes,OPECisnowengagedina"price
war"withtheUS.Whatthatmeansisthatit'srelativelycheapto
pumpoiloutofplaceslikeSaudiArabiaandKuwait.Butit's
moreexpensivetoextractoilfromshaleformationsinplaces
likeTexasandNorthDakota.Soasthepriceofoilkeepsfalling,
someUSproducersmaybecomeunprofitableandgooutof
business.Andthepriceofoilwillstabilize.Atleastthat'swhat
OPECmembershope.

Abigquestion:Willlowoilpriceskillthe
USshaleboom?
ByJanuary2015,itwasclearthatlowpriceswerestartingtopinch
producersintheUnitedStatesandCanada.Theonlyrealquestionishow
muchitwouldhurt.
Analystsoftenfocusonametriccalledthe"breakevenprice"foroil
drillingprojectsthepriceofoilnecessaryforaprojecttoproduce

reasonablereturns.ScotiaBankhasestimatedbreakevenpricesfor
variousshaleandoilsandsprojectsacrossNorthAmerica: