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Page added on April 3, 2016
Saudi Arabia’s Last Weapon In The Oil War
Saudi Arabia may soon have to use its last weapon in an all out war against American Frackers, and the Iranian and Russian oil producers: Break the riyal peg to the US dollar.
For almost three years, the Kingdom has been using a conventional weapon for fighting the oil war: raising oil output. The logic of using this conventional strategy was quite simple: let higher output crush oil prices, and the Kingdom’santagonists along the way, as I discussed in a previous piecehere.
Now there’s plenty of evidence that this weapon has hit the target. US oil rigs have been shutting down one after another,and weak American frackers have been going out of business or striving to cope with falling revenues and piles of debt.
|
Company |
Qtrly Revenue Growth |
Total Debt |
Output Cut |
|
Devon Energy |
-30.40% |
$13.14B |
10% |
|
Marathon Oil |
-50.40 |
$7.28B |
10% |
|
EOG Resources, Inc. |
-48.20 |
$6.66B |
5% |
Source: Finance.yahoo.com; Wall Street Journal
The trouble is that this conventional weapon has backfired, hurting Saudi Arabia. First, lower oil prices have opened up a big hole in the Kingdom’s fiscal and social budget. Second, they have been draining foreign currency reserves, which are used to defend the riyal‘s peg against the dollar.
The trouble is that this conventional weapon has backfired, hurting Saudi Arabia. First, lower oil prices have opened up a big hole in the Kingdom’s fiscal and social budget. Second, they have been draining foreign currency reserves, which are used to defend the riyal‘s peg against the dollar.
Worst of all is that in spite of raising output, the Kingdom’s oil market share has dropped, according to the Financial Times. The Kingdom’s share, in the U.S., dropped from 17 in 2013 to 14% in 2015.
We all know what that means in a global market: a further erosion of the Saudi Arabia’s market power, and its ability to lead OPEC.
That’s why the Kingdom has no choice but to use an unconventional weapon in the oil war, in my opinion, which is to break the riyal ‘s peg against the American dollar—in essence, let the riyal fall.
That will make Saudi oil less expensive in global markets, help the country regain its market share in the US, and finish up the war against American frackers.
A weaker riyal will further help Saudi Arabia execute on its new strategy of producing and exporting refined products.
The problem is that this weapon will backfire, too, and hurt Saudi Arabia’s economy. The prospect of a lower riyal, for instance, could cause a capital flight. And it could fuel inflation soon after it takes place, widening the Kingdom’s social budget deficit.
That’s why it is the weapon of last resort.
21 Comments on "Saudi Arabia’s Last Weapon In The Oil War"
makati1 on Sun, 3rd Apr 2016 8:14 pm
” Break the riyal peg to the US dollar.”
Do it!
Actually, the weapon of last resort is for the KSA to accept other currencies in payment for oil. KA-BLAM!
Pass the popcorn. The show is getting better and better.
Anonymous on Mon, 4th Apr 2016 1:28 am
Yea, wouldn’t that be something. If the ‘sauds’ ever started selling their oil for Euros or whatever, you can bet the united snakes would immediately discover that saudi Arabia’s has an appalling human rights record, is ruled by a hereditary despotic family, and supports ‘terrorism’ (aka uS proxies).Within hours, the inept ‘us marines’ and every british soldier that could carry a rifle would be on their way to ‘liberate’ arabia.
Hardly surprising the author never brought up the topic of accepting other currencies. But at least Forbes admits the ‘goal’ was to cripple Russia and Iran. uS frakers, lol, collateral damage. Worth it to put the hurt on its enemies. ‘Saud’s don’t care if uS frakers and their low-qual not-quite oil drilling poisons its homeland or not, Only obeying washingdum and Tel Aviv matters.
sxm on Mon, 4th Apr 2016 2:11 am
Their currency wont go down. Swiss frank unpegged from EUR and went up contrary all the bullshit.
makati1 on Mon, 4th Apr 2016 2:34 am
sxm, the KSA is not Switzerland.
Go Speed Racer on Mon, 4th Apr 2016 2:38 am
I got lots of popcorn for all of us. Was popping some for Fukushima, the recession, and Donald Trump campaign. Now popping for Saudi Arabia to gum up the works with new funny money.
Go Speed Racer on Mon, 4th Apr 2016 2:41 am
Hey kool check it out, we are gonna melt ALL of Antarctica. I thought that sucker was land-based, but nooooo….
http://www.nytimes.com/2016/03/31/science/global-warming-antarctica-ice-sheet-sea-level-rise.html?_r=0
Awesome so if i am gonna buy myself a 747, put in a bowling alley, and fly it around empty for entertainment, I better get goin on that.
Davy on Mon, 4th Apr 2016 8:26 am
Not so friendly Asia:
http://www.zerohedge.com/news/2016-04-04/vietnam-seizes-chinese-ship-gulf-tonkin
PracticalMaina on Mon, 4th Apr 2016 8:41 am
The last weapon they’ve got…CO2 and Methane, they are gonna murder suicide so hard!
shortonoil on Mon, 4th Apr 2016 9:03 am
“For almost three years, the Kingdom has been using a conventional weapon for fighting the oil war:”
OutPut from EtpPro – Production
2011-2014
Conventional Crude
Average Change – 0.61 Mb/d/Yr
Average Yearly Change – 0.81%
Total Production – 82.92 Gb
We are a little curious as to where all this oil that Forbes claims that Saudi Arabia is flooding the market with, is coming from? Must be Mars – it sure wasn’t produced on this planet!
http://www.thehillsgroup.org/
tahoe1780 on Mon, 4th Apr 2016 10:38 am
What could this lead to? http://www.zerohedge.com/news/2016-04-04/saudis-retaliate-oil-freeze-fallout-ban-transport-iranian-crude-territorial-waters
rockman on Mon, 4th Apr 2016 1:01 pm
Granted no one knows the actual numbers since the KSA classifies them as state secrets. But according to some sources the KSA was producing about 10.04 mm bopd in July 2013. The latest number: Dec 2015 = 9.94 mm bopd. But that’s production…not exports. According the KSA itself they exported only 7.15 mm bopd in 2015. So while some numbers show (and some don’t) a slight increase in its PRODUCTION in the last year there’s no official number as to how much it exported in 2015.
But the numbers don’t really matter when it comes to understanding a motive the KSA might have for its current production level. So much bullsh*t repeated about “market share” without anyone explaining why increasing market share would be a motive for the KSA. IOW if they intentionally caused the price of oil to collapse what would the MATERIALLY GAIN from any increased market share? I assume everyone understands what gaining market share does for the producer of any commodity: INCREASED REVENUE from INCREASED SALES.
But that isn’t what the KSA has experienced, has it? They might be selling a tad more oil but as a result of lower oil prices their revenue has decreased about $150 BILLION per year. Thus they obviously didn’t target that result, did they? Now let’s analyze the “hurt the US shale producers” THEORY. The obvious question: why would they try? Certainly not to increase revenue since a high school student could tell you that reducing the price of you commodity 60% isn’t going to increase one’s revenue. So maybe to reduce competition for their sales? What competition: the KSA sold every bbl of oil it could produce. Did anyone see a single story claiming the KSA was send any oil to long term storage?
Seems the only value the KSA would gain from forcing oil prices down would be the bragging rights to shutting down much of the US shale plays. So does anyone think the KSA considers giving up hundreds of $BILLIONS in oil sales revenue is worth that? Just amazing how so many kept say “MARKET SHARE!!!”without spending 60 seconds to consider what that means and why it should be a goal for the producer of any commodity. And I hope no one makes a fool of themselves by claiming the KSA will make up for that revenue lose because the US shale won’t kick in again when prices get high enough. Remember: the shale boom followed a long period of time during which oil prices were as low OR LOWER than they are today. The only difference in repeating the shale next time around that the geology and techology have been fine tuned.
shortonoil on Mon, 4th Apr 2016 1:38 pm
“And I hope no one makes a fool of themselves by claiming the KSA will make up for that revenue lose because the US shale won’t kick in again when prices get high enough.”
Saudi America, American Energy Independence and now we have Saudi Market Share. As soon as the Saudis stop flooding the market from their Martian operations the price of oil will zoom right back to $100. “In the meantime, there is one hell of a buy on a well hidden under a cow flop in North Dakota that you should take a look at. Now is the time to buy, buy, buy”!
The amazing thing is that they just keep trying the same old BS over, and over, and over! And some keep buying it!
PracticalMaina on Mon, 4th Apr 2016 1:47 pm
Rockman maybe it is not the shale plays they are after. Iran, renewables, Russia and EV seem to be a more reasonable targets, considering the domestic oil biz and Saudi have traditionally been allies. If it were not for fracking, Saudi pumping hard, as well as Russia, the end of the oil age may have already been upon us.
Plantagenet on Mon, 4th Apr 2016 2:07 pm
shortonoil must be short on common sense. Saudi does’t produce their oil on Mars—it produces the oil from Ghawar and other oil fields in Saudi Arabia.
Why don’t you know that?
Cheers!
rockman on Mon, 4th Apr 2016 3:14 pm
Practicle – Those could be considerations. But remember the basic control of the price of oil: it’s the buyers, not the producers, that control the price. All the KSA can control is how much oil they export. true hat if they cut exports that would put upwards pressure on prices.
Now remember when prices began dropping: the KSA was producing less oil then today. So it’s still up to someone to explain why oil prices fell even though the world was consuming just as much before the price collapse as after. The short answer; because they world couldn’t afford to continue paying what it had been paying. And as the buyer pulled away the producers started cutting prices trying to max revenue. And kept cutting prices to a level where the global consumers were willing/able to buy more.
Rick Bronson on Mon, 4th Apr 2016 7:09 pm
KSA has all tactics in the Oil game.
They reduce the supply and increase the price.
They increase the supply and reduce the price.
Or they just send some phony news to scare others.
As the American Shale and Canadian Sands goes down there is golden opportunity for KSA, Russia, Iraq & Iran to boost supply.
Let’s see to what extent they can increase and what sort of oil they bring to the market.
makati1 on Mon, 4th Apr 2016 7:19 pm
It’s ALL about money, or the lack thereof, not the amount of oil available. I keep saying that it is the inability of consumers to afford oil at any profitable price that is going to end the age of petroleum, not the amount they can pump.
No profit, no oil. And a few million rich elite cannot consume enough at a high price to sustain the system for long.
Boat on Mon, 4th Apr 2016 8:31 pm
mak,
“I keep saying that it is the inability of consumers to afford oil at any profitable price that is going to end the age of petroleum, not the amount they can pump”.
Of course you keep saying that. Steady rising demand in spite of major efficiency gains proves you wrong. It will take electric cars, nat gas/semis, or climate change to slow oil demand.
makati1 on Tue, 5th Apr 2016 12:24 am
Boat, if the Chinese were not buying and storing huge amounts of oil, the numbers would be radically in the contraction mode and probably are anyway if the real numbers were known. The largest consumer, the Us, is using less and less every day. But, keep dreaming of an oily future as we slide down the slope to the 3rd world. I live there. Soon it will be obvious that you do also. Enjoy!
rockman on Tue, 5th Apr 2016 5:16 am
“They reduce the supply and increase the price.” Not necessarily. In 2009 global oil production DECREASED by 300 million bbls and the average price of oil DECREASED from $94/bbl to $56/bbl.
“They increase the supply and reduce the price” In 2012 the world produced almost 900 million bbls MORE than it did in 2010 and the price of oil INCREASED during that period from an average yearly value of $75/bbl to $95/bbl…an increase of 27%
Folks are free to have any OPINION they like about the relationship between the price of oil and the production rate. But it doesn’t change the fact that global demand and what consumers are willing to pay determine the price of oil and not how much oil is in the market place. Which is not an OPINION and not supported by the FACTS just noted.
shortonoil on Tue, 5th Apr 2016 1:41 pm
“shortonoil must be short on common sense. Saudi does’t produce their oil on Mars—it produces the oil from Ghawar and other oil fields in Saudi Arabia.
Why don’t you know that?
Cheers!”
It is almost possible to make a post idiot proof; but it can’t be make Plant proof? Go figure? Thank you Plant for those words of such profound wisdom! There is hardly anyone here that will not be moved by their earth shaking significance! See post above: there wasn’t any oil produced on this planet that could have moved the market price down by 70%. So it must have been produced somewhere else? I’m just guessing that it was Mars because Mars is closer than Titian.