OIL STORM RIS­ING Saudis look to win price war as pro­duc­tions costs may hit U.S., ad­ver­saries

The Washington Times Weekly - - Geopolitics - BY PA­TRICE HILL

Shale drillers hit hard

Con­sumers are en­joy­ing a break from high gas prices, which have fallen be­low $3 a gal­lon in many ar­eas, but the drop has pre­cip­i­tated a cold war among oil pro­duc­ers that has all the in­trigue, sus­pense and loom­ing de­struc­tion of a Tom Clancy novel.

Pre­mium crude prices since June have plunged by 25 per­cent, land­ing Wed­nes­day at lev­els near $80 a bar­rel in New York. That makes it painful or un­eco­nomic for pro­duc­ers in Rus­sia, Venezuela and Iran, for the pi­o­neer­ing shale oil drillers in Amer­ica’s heart­land and for Canada’s oil sands ex­trac­tors.

The key player in the un­fold­ing drama is Saudi Ara­bia. De­spite un­com­fort­ably low prices even for the wealthy king­dom, Saudis last week made it clear that they will not curb oil pro­duc­tion in an ef­fort to sta­bi­lize the mar­ket.

In fact, the world’s largest oil pro­ducer upped the stakes and in­creased ten­sions by an­nounc­ing that it would cut prices to main­tain mar­ket share in Asia, which is now the main des­ti­na­tion for Mid­dle East­ern oil.

The Saudis’ aban­don­ment of their long-stand­ing role as chief reg­u­la­tor of oil prices trig­gered a mar­ket plunge and sparked a rash of con­spir­acy the­o­ries. Some said the king­dom was schem­ing with the U.S. and its army of shale drillers to flood the mar­ket with oil and bank­rupt rogue play­ers such as Rus­sia, Venezuela and Iran.

A steep drop in oil prices dur­ing the Rea­gan era led to the col­lapse of the Soviet Union, which, like Rus­sia to­day, de­pended on oil as the lifeblood for its econ­omy and gov­ern­ment rev­enue.

The drop in oil prices com­ple­ments sanc­tions im­posed by the West over Rus­sian ag­gres­sion in Ukraine this year. Oil spec­u­la­tors sus­pect the move serves to drive Rus­sia’s econ­omy into re­ces­sion.

Moscow no doubt is feel­ing se­ri­ous pain. An­a­lysts say it needs prices to stay above $105 a bar­rel to main­tain the flow of oil rev­enue into gov­ern­ment cof­fers.

“Eighty dol­lars per bar­rel does great eco­nomic harm to our en­e­mies Rus­sia and Iran,” said economist and CNBC com­men­ta­tor Lawrence Kud­low. “That’s a good thing.”

U.S. ad­ver­saries Venezuela and Iran, like Rus­sia, de­pend on oil to power their economies and need prices as high as $125 a bar­rel to stay fis­cally sol­vent. They could face an all-out eco­nomic col­lapse if the price drop is sus­tained.

The rad­i­cal states have been among the most vo­cal mem­bers of OPEC to ex­press alarm. Venezuela is call­ing for an emer­gency meet­ing of the car­tel to forge a pact to curb pro­duc­tion and prop up prices. The next reg­u­larly sched­uled OPEC meet­ing is Nov. 27.

The price pain also is felt at home, and some an­a­lysts say Amer­i­can en­trepreneurs in the shale oil patch could be among the big­gest losers.

By var­i­ous es­ti­mates, the shale drillers and com­pa­nies tap­ping into Canada’s oil sands need prices to stay above $50 to $80 per bar­rel to stay in business.

Some sce­nar­ios show that a sus­tained drop in oil prices for months or years could cause the bank­ruptcy of many shale pro­duc­ers and force com­pa­nies to shut down drilling op­er­a­tions and lay off work­ers, slam­ming the most ro­bust part of the U.S. econ­omy in the process.

Another school of an­a­lysts with a taste for drama says the Saudis are try­ing to force North Amer­i­can pro­duc­ers out of the oil mar­ket.

Putting pres­sure on the shale drilling in­dus­try would elim­i­nate the most im­me­di­ate cause of the grow­ing glut of oil on world mar­kets, which has be­come a prob­lem for the Saudis and other long­time Mid­dle East­ern pro­duc­ers. U.S. pro­duc­tion un­ex­pect­edly surged by 4 mil­lion bar­rels a day in the past five years thanks to the shale oil revo­lu­tion — dis­plac­ing Mid­dle East­ern im­ports to the U.S.

“They’re look­ing to the U.S. to cut pro­duc­tion be­fore they do,” said Robert McNally, pres­i­dent of the Rap­i­dan Group LLC and a for­mer en­ergy ad­viser to Pres­i­dent George W. Bush. “That’s the new mes­sage that’s just now ar­riv­ing to the oil patch in the United States.”

The Saudis ap­pear to be­lieve that U.S. shale pro­duc­ers have as much flex­i­bil­ity as they do to turn on and off their oil sup­plies, he told Platt’s En­ergy Week TV. But he said pro­duc­ers in Texas ex­pect Saudi Ara­bia and OPEC to act be­fore they do, putting the two sides on a col­li­sion course.

U.S. drillers “are sort of bullish. They’re kind of con­fi­dent that oil prices are go­ing to re­main strong,” he said. “And when you started to broach the sub­ject, well, what if they con­tin­ued weak­en­ing? I sensed a con­fi­dence that, again, Saudi Ara­bia and OPEC coun­tries would have to cut [out­put] to keep prices at $90, where most of th­ese folks would be eco­nom­i­cal in terms of the shale oil pro­duc­tion.”

With nei­ther side will­ing to move first, oil prices could con­tinue to plunge, Mr. McNally said.

“I think Saudi Ara­bia could with­stand a drop into the $70s or $60s for a short pe­riod of time — much bet­ter than some of their ri­vals like Iran, which needs $130 oil,” he said. “And also Saudi Ara­bia has a war chest, about $750 bil­lion it’s earned in re­cent years, and they can draw on that if nec­es­sary to tide things over while they sweat some pro­duc­tion out of the U.S. and other com­peti­tors.”

U.S. pro­duc­ers may tol­er­ate lower prices longer than many ex­pect, he said, in part be­cause in­vestors in the shale com­pa­nies are look­ing for in­creased pro­duc­tion rather than prof­its. Nev­er­the­less, Mr. McNally ex­pects that a re­vival in U.S. pro­duc­tion would level off quickly and start drop­ping if prices stay be­tween $50 and $80 for an ex­tended time.

“The prices will con­tinue to fall un­til one side or the other or somebody is will­ing to in­di­cate they’re able to with­draw sup­ply,” he said.

Though the Saudis need oil prices above $82 to fi­nance their lav­ish so­cial spend­ing and eco­nomic plans, they and other Mid­dle East­ern pro­duc­ers such as Kuwait and the United Arab Emi­rates can eas­ily sur­vive a drop in prices be­cause their costs to pro­duce oil are far lower than those for North Amer­i­can drillers or Rus­sia.

Ex­tract­ing oil from shale and Canada’s oil sands costs $50 to $100 a bar­rel, com­pared with $25 a bar­rel on av­er­age for con­ven­tional sup­plies from the Mid­dle East and North Africa, ac­cord­ing to the In­ter­na­tional En­ergy Agency.

The drop in oil prices “has ex­posed a vul­ner­a­bil­ity” for U.S. pro­duc­ers, said Peter N. Rigby, an an­a­lyst at Stan­dard & Poor’s Corp. “In­no­va­tions in hor­i­zon­tal drilling and hy­draulic frac­tur­ing have not come cheaply. … If Saudi Ara­bia starts a price war to main­tain its mar­ket share, U.S. oil pro­duc­tion could fall.”

OPEC is Saudis’ tar­get

Some more sober an­a­lysts say the Saudis have a less-in­trigu­ing agenda: They are merely try­ing to put pres­sure on other OPEC states such as Iran and Venezuela, which in the past have taken ad­van­tage of the king­dom’s will­ing­ness to curb pro­duc­tion when oil prices fall. Th­ese OPEC “cheaters” see Saudi re­straint as an op­por­tu­nity to keep pro­duc­ing to in­crease their own mar­ket share.

The king­dom’s change of be­hav­ior also re­flects lessons learned dur­ing the 1980s and 1990s, when even dras­tic pro­duc­tion cuts from 10 mil­lion bar­rels a day to 3 mil­lion bar­rels were not suf­fi­cient to raise prices. Saudis this time will seek a wider agree­ment within OPEC, th­ese an­a­lysts say.

Ac­cord­ing to OPEC es­ti­mates, global pro­duc­tion must fall by more than 2 mil­lion bar­rels a day in the first half of 2015 to bal­ance the mar­ket. This is too much for Saudi Ara­bia to carry out on its own, said Bloomberg oil strate­gist Ju­lian Lee.

Yet six OPEC pro­duc­ers — in­clud­ing Iraq, Iran and Venezuela — plan to boost out­put next year. Thus, Saudi Ara­bia is likely to seek in­di­vid­ual out­put quo­tas for OPEC na­tions be­fore it agrees to any cut­backs of its own, Mr. Lee said. Per­sian Gulf coun­tries such as Kuwait and the United Arab Emi­rates gen­er­ally are ex­pected to back Saudi Ara­bia’s plan.

“At the end of the day, Saudi Ara­bia calls the shots,” said Mr. McNally, but it may de­cide ac­tion is needed be­fore the next OPEC meet­ing. “They may an­nounce a tar­get low­er­ing on Nov. 27,” he said, or “they may ver­bally ex­press con­cern. But in terms of re­ally ad­just­ing sup­ply vol­un­tar­ily, only re­ally Saudi Ara­bia would do that.”

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.