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Page added on November 11, 2014
Saudi Arabia is trying to sabotage America’s shale oil boom
We’ve been here before. By “here,” I mean Saudi Arabia throwing its weight around in the global oil markets and triggering what we can only call a kind of reverse oil shock as a result.
The consequences were particularly visible last Tuesday, when Saudi Arabia slashed the price at which it is willing to export crude oil to the United States, even as it boosted prices to buyers in Europe and Asia. That sent the benchmark U.S. crude oil price — West Texas Intermediate — skittering down to $76.45 a barrel, a level not reached in three years.
Welcome back to the geopolitics of oil.
If you thought that crude oil prices were set simply by what is happening to the global economy — the forces of supply and demand, and the answers to pressing questions such as whether China’s economy can struggle back to health — then you’ve simply been reading too much Adam Smith lately. Or else you have forgotten the history of the oil market.
When the magnitude of the U.S. shale oil boom began to become clear and forecasts put U.S. energy output on track to outpace that of both Russia and Saudi Arabia by 2020, it seemed as if the limiting factors were the global economy (demand) and technology (supply).
Clearly, those are still crucial, and have played a role in the deflation of what some have labeled a shale oil bubble.
The surge in production from hydraulic fracturing, or fracking, was dramatic, but Americans didn’t start consuming more, in response. Why should they? A typical middle-class family is likely to be worse off today than it was a decade ago — perhaps even worse off than they were when Ronald Reagan was still president. Little wonder, then, that all that new supply hit the market with a thud, helping drive prices down more than 25 percent since last summer.
But the latest blow to the market is only partially about supply and demand. Rather, it’s about how Saudi Arabia is responding to the shale oil production boom in the U.S., and the threat that boom poses to its preeminence in the world of energy production.
This isn’t the first time that Saudi Arabia, with the help of its friends in OPEC, has used the cartel to keep its own market clout more or less intact and its own revenues flowing, sacrificing higher prices to that end. If it succeeds, it can dampen investor enthusiasm for shale oil in the U.S. and starve companies of the capital they need, forcing them to shut down wells in response to lower prices.
For decades, the Saudis — along with energy producing nations that were members of OPEC, or the Organization of Petroleum Exporting Countries — have determined energy prices, their ability to do so limited mostly by those global economic forces. It has been 41 years since OPEC first wielded its market clout to real effect, putting an oil embargo on sales to the U.S., Canada, Japan, the United Kingdom, and the Netherlands in retaliation for their support of Israel in the 1973 Yom Kippur war. U.S. oil prices exploded, from $3 to $12 a barrel, and gas stations began rationing fuel supplies.
Today? Saudi Prince Alwaleed bin Talal describes shale oil production in the United States as “an inevitable threat” to Saudi Arabia and OPEC, eating into demand for OPEC member nations’ exports and their revenues. What the prince didn’t even mention is that other non-OPEC members, like Russia (already a giant oil and natural gas producer) and China also are investigating shale reserves, further undermining OPEC’s pre-eminence, and its control over supplies and prices.
Saudi Arabia is in an interesting position. Its proven oil reserves are still the world’s second largest, and it is home to the world’s largest oil fields. But they are aging, and there are plenty of questions as to whether their production levels may have peaked. The U.S. already has overtaken the Saudis as the world’s largest oil producer. Their window of opportunity to reassert some degree of control has been closing rapidly.
On the surface, it seems as if driving prices lower is counterintuitive, especially given the budget issues the country faces: since the Arab Spring in 2010, its spending on domestic programs has soared as it tries to ward off any similar discontent among its own population. Higher oil prices helped to finance that, but then, as the threat to its market share from shale oil grew, Saudi Arabia boosted output in both 2012 and 2013, attempting to drive costs lower while still continuing to finance its costly budget programs.
The last time the Saudis tried this tactic was back in the 1990s, when an influx of new supply from Latin America threatened its pre-eminence. It’s noteworthy, then, that the Saudi oil minister is making a visit to Venezuela — the cartel’s weakest member, fiscally — this week. Perhaps drumming up support for a cartel-wide initiative?
Saudi Arabia fought the same battle in the 1980s, less successfully, arguing for OPEC members to limit production quotas. When OPEC members reneged on their commitments, the Saudis acted unilaterally, slashing their own output in 1985 to a quarter of the level it had been at five years earlier. When that didn’t work, they’d try something different: flooding the global markets with cheap oil. The glut remained for years, with oil prices struggling to move north of $10 a barrel. The tactics wreaked havoc on Saudi Arabia’s own finances, but they also made North Sea oil economically unprofitable to produce — and convinced OPEC members to fall in line.
Once again, Saudi Arabia has acted unilaterally, startling fellow OPEC members, many of whom already are squabbling over what they believe the “right” price for oil should be. With a cartel meeting scheduled to take place in Vienna at the end of the month, there’s a lot at stake, including the short-term prospects for the U.S. shale oil and gas industry.
Long term, however, the Saudis may be building their strategy on shifting sands: The technology that made shale oil development possible in the first place is becoming less expensive every year — and every year that passes causes the Saudi reserves to become that much older and less capable of being boosted in response to a perceived market threat. Cartel power and geopolitics may yet fall victim to another factor influencing supply and demand: demographics.
17 Comments on "Saudi Arabia is trying to sabotage America’s shale oil boom"
dave thompson on Tue, 11th Nov 2014 7:14 pm
The shale industry was always doomed to a bust.
eugene on Tue, 11th Nov 2014 7:34 pm
It’s the Russians, it’s Ebola, it’s terrorists, enemies, enemies everywhere. They’re coming to get us, coming to get us. I’m an old PTSD vet with lots of paranoia but I pale in comparison to what I read. Even I can’t imagine all this crap. One thing, it all helps me figure I’m more sane than I thought.
Davy on Tue, 11th Nov 2014 7:36 pm
Well, look back a few years and ask yourselves was the US inadvertently sabotaging the Saudi oil machine with our shale boom? What is good for the goose works for the gander. Like Rock always says “It just business Lol”.
These whiners need to get some pubic hair and man up. This is the real world of life in the global casino. Think of all the scalps taken by some of these operators and the Wall Streeters. Huge money was made and lost and is yet to be lost. This is going to smell bad eventually as all bubbles do. Next thing that will happen is a whine for bailouts and subsidies. I can see the lobbyist now lining the capitol.
I applaud the shale folks though. They bought me some valuable prep time. I am pretty sure it help the system manage all the central bank gaming. Just the fact the shale boom maintained global supply made a difference in confidence levels. We have to give credit where credit is due. Yet, these folks that think shale is our savior need to get a life and realize it is a retirement party and possibly sooner than later.
Makati1 on Tue, 11th Nov 2014 7:48 pm
The Saudis can afford to kick the Us now that China is their biggest customer and always will be. Wait until they trade their oil for gold backed Yuan…
coffeeguyzz on Tue, 11th Nov 2014 9:29 pm
For all you guys who know little about the nuts and bolts of the shale industry, last night’s announcement out of the Bakken will most likely go completely over your heads.
For people who can appreciate how interconnected things are, as well as the inevitable economic impacts, last night’s info release of back-to-back world record setting frac stages in two adjacent wells in the Bakken will be seen for what it is, namely, a huge step change in the ongoing evolution of shale development.
Not only did first one well have 94 stages frac’d, the second one followed with 102 stages. Of all the consequences from this stunning technological achievement (I’ll not delve into the operational minutiae regarding the time/money saving components – among many other benefits), the most significant is that both wells set IP production records for the Bakken of +7,100 boepd and +7,800 boepd.
Suffice to say that as this coil tubing conveyed fracturing system is rapidly adopted throughout ALL shale fields, Mr. Hughes’ recently released work will also set a world record of sorts … fastest analytical obsolescence/inaccurateness of all time.
Nony on Tue, 11th Nov 2014 9:38 pm
The shale industry has kicked ass. POD is supposed to be about price rising. Shale arrested the price increase and then partially reversed it. Without shale we would be 150+ instead of kissing on 75.
Energy Investor on Tue, 11th Nov 2014 10:10 pm
Coffee, the more interesting point isn’t the ground these new frac wells cover or their output…it will be the revellation (or concealment) of the depletion rate versus initial cost.
At the end of the day it is full cycle return and EROEI that matters for both the investor and the economy.
Northwest Resident on Tue, 11th Nov 2014 10:18 pm
Is it the American shale boom that Saudi Arabia is trying to sabotage? Or is it the Canadian tar sands that Saudi Arabia is looking to hurt real bad?
The speculation that SA is doing this to stick a fork in the American shale boom is just that, pure speculation, and rampant speculation at that.
So, why not speculate some more, and this actually makes a lot more sense to me, that the real target is Canadian tar sands. First reason why it makes more sense to me is because the American shale boom is due to fizz out on its own anyway. And the second reason is explained in this article:
The Major Threat to Some of the Largest Oil Producers
“In 2013, the U.S. imported an average of about 1.3 million barrels of oil per day from Saudi Arabia. In August, that fell to just 894,000 barrels per day. That’s a 31% decline in imports.
Meanwhile, the U.S. imported 3.1 million barrels of oil per day from Canada in 2013. In August, that number went up to 3.4 million barrels per day. That’s a nearly 10% increase in imports.
So a lot of the imports the U.S. cut from Saudi Arabia are now coming from Canada. For Saudi Arabia, this has been a huge hit to its sales. It’s hard to find new buyers for crude oil right now. So Saudi Arabia is taking a shot at Canada because it knows it can likely win a price war.”
http://wolfstreet.com/2014/11/10/the-major-threat-to-some-of-the-worlds-largest-oil-producers/
Plantagenet on Tue, 11th Nov 2014 10:37 pm
The Saudis don’t seem to have a clue that their own oilfields are peaking and soon will see irreversible production declines.
They will rue the day they decided to sell their oil so cheap.
shallowsand on Tue, 11th Nov 2014 10:56 pm
Coffee. I read about these coiled tubing fracs awhile ago. You say last night, can you provide any more info, such as company, well name, etc. Also, how much more does this cost?
marmico on Tue, 11th Nov 2014 11:40 pm
http://www.businesswire.com/news/home/20141110006673/en/NCS-Energy-Services-Sets-Completion-Records-94#.VGLywCx0yM8
marmico on Tue, 11th Nov 2014 11:45 pm
http://thebakken.com/articles/876/clarifying-coiled-tubing
dn32844 on Wed, 12th Nov 2014 5:23 am
I want more, I want more,I want more. All greed of of the U.S.’s money monsters has done so far has been creation of hare for this nation and isolation. I am so happy that others are rising.That might slow down warmongring,chaos and destruction our government creates around the world to satisfy greed of some bastards.
Harquebus on Wed, 12th Nov 2014 2:58 pm
I notice that coffeeguyzz uses boepd and not bopd.
Speculawyer on Wed, 12th Nov 2014 3:13 pm
I’m tired of this conspiracy theory. You really think the Saudis want less money for their oil? They are just a victim of lower oil prices like every other producer. And it is not like they have massively increased their production or anything like that.
But they probably don’t mind the lower prices too much . . . they still make a healthy profit, they have lots of money in the bank, and I’m sure they are enjoying the pain it inflicts on Iran and Russia.
synapsid on Wed, 12th Nov 2014 5:47 pm
For all:
Ron Patterson’s suggestion that the Saudis are telling the rest of OPEC that they are through being the heavy lifter all the time–that sounds likely to me.
Collateral effects on US LTO production and Russian income from oil, those are icing on the cake.
Bob Owens on Wed, 12th Nov 2014 8:13 pm
The SA boys have been drinking too much fracking Koolaid. They have come to believe that fracking is actually a real threat to them. Their problems lie in their own country: too many people, racially divided, consume too many resources, have a rich elite (Just like the USA!).