Saudi Prince Warns Falling Oil Prices Could Be A ‘Catastrophe’

24 Comments on "Saudi Prince Warns Falling Oil Prices Could Be A ‘Catastrophe’"

Davy on Wed, 15th Oct 2014 8:05 pm 



Personally, for what it is worth, I see a natural floor soon. The whole dynamics of the energy and global central bank financial repression cannot allow too much deflation into the system. Falling energy prices have a profound deflationary effect. The central banksters will have to have some control over oil prices just like they did with gold. There game is all about macro manipulation. Oil and gold are central to this game.

Northwest Resident on Wed, 15th Oct 2014 8:29 pm 



Davy — Do you think that this Saudi Prince suddenly one day found out about SA’s plans to announce the price cut? Just curious what your thoughts are. My personal opinion is that I seriously doubt that Prince Alwaleed bin Talal al-Saud is at all “astonished”, and instead is simply playing his scripted part in the unfolding drama. The letter and his feigned reaction is for public consumption, if I were to guess (which I am…).

Northwest Resident on Wed, 15th Oct 2014 8:37 pm 



And since I’m on a roll, here’s another speculative guess.

WHY is SA lowering their price, announcing they intend to keep their price low for a period of time, and simultaneously pressuring their buyers into signing long term contracts for delivery?

Speculative answer: Because SA is in possession of information that leads them to believe that we haven’t hit the bottom of the price drop for oil yet. By cutting their price to what they believe is above the eventual floor and getting buyers to sign up for long term delivery now at that price, they end up making out better than if they were to just sell for whatever the going rate is now and as the price continues to slide downward.

Just one possibility…

Davy on Wed, 15th Oct 2014 8:39 pm 



Yea NR, there is definitely the potential for scripting. That same game has been played in the US with someone taking a populist tone when in reality it is just for deflection.

Kenz300 on Wed, 15th Oct 2014 9:03 pm 



You can’t sell it for less than the cost to produce it….. and not go broke………..

For most countries the cost of production is higher than in KSA…….

If they push a few oil suppliers into bankruptcy or scare investors away from higher cost shale, tar sands or deep water projects they will have accomplished their goal or limiting competition.

Cheaper oil prices also hurts alternatives to oil….

Lower prices are only temporary and will not last……..
Rising demand from China and India will not go away.

Makati1 on Wed, 15th Oct 2014 10:39 pm 



Kenz300, I have to agree with you on this one. Asia as a whole is averaging GDP increases of over 6% per year and will into the foreseeable future. No demand drop overall. Just growth. Same cannot be said for the West. Just the opposite.

JuanP on Thu, 16th Oct 2014 8:59 am 



“Saudi Prince Warns Falling Oil Prices Could Be A ‘Catastrophe’”
Hegot that much right! 😉

JuanP on Thu, 16th Oct 2014 9:02 am 



The Saudi claim that they are willing to sell their oil cheaper for years is a bluff, and anyone who believes it is being fooled.

rockman on Thu, 16th Oct 2014 9:03 am 



Let me ask how folks envision the conversation between the KSA and one of the refineries that buys oil from them:

Mr. Refiner: OK…I need 5 million bo this month and will pay $100/bbl.

Mr. KSA: OK but I’m sorry, I will allow you to pay me only $80/bbl. I will not accept that extra $100 million you’re offering.

Mr. Refiner: Great but why are you rejecting that extra $100 million?

Mr. KSA: It’s simple: by forcing you refiners to pay $80/bbl instead of $100/bbl and giving up $70 billion over the next 12 months we expect to make more income a few years down the road.

Mr. Refiner: So you’ll give up $140 BILLION over the next two years so you can make an unknown amount down the road?

Mr. KSA: I knew it would be too complicated for you to understand. Just take your extra $100 million, the 5 million bbl’s of oil and go away.

Alternate conversation:

Mr. Refiner: I want to buy 5 million bb’s and will only pay $80/bbl.

Mr. KSA: OK but I want $100/bbl.

Mr. Refiner: F*ck you. $80/bbl or I’ll buy it from the next exporter that will sell it at $80/bbl. I’ve looked at the projected declining demand in the market in which I sell my products and I don’t think I’ll be able to charge enough to make an acceptable margin if I pay $100/bbl. It would make more sense for me to not buy any oil at $100/bbl if I have to sell my products below costs. More profitable to just sell out of my inventory and not crack any new oil this month.

The Rockman sells oil just like the KSA. He has never dictated what the buyers pay for his oil. His only option is to sell to a different buyer. But since all the oil buyers in his area publicly post what they are paying there’s never much of a difference. His only power is to not sell his oil that month and suffer $zero revenue…rarely an option for him. Remember if he doesn’t empty his oil tanks every few days he has to stop producing.

Same for the KSA. First, much of the KSA production is sold under long term contract. Contracts that have the sales price linked to some benchmark. So if the benchmark formula calculates a lower price then the KSA has no choice but to sell at that price. They are free to charge what they want by selling uncontracted oil on the spot market. But again the spot market sets that price… not the KSA. Their only option is to keep that oil in storage.

And again I’ll point out that with the KSA selling oil at $80/bbl they are still earning more then they were just several years ago. It might help to remember that the KSA was selling their oil for less then $77/bbl just last Sept 2010. For a price refresher see

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=ISA4990008&f=M

So ask a simple question: if the KSA “forced” the price of oil down to $80/bbl this week why did they “force” the price of oil down to $77/bbl in Sept 2010 but then “forced” the price of oil up to $111/bbl in January 2012?

Ya know it almost seems as if the KSA has little to no control over the price of oil. LOL.

Northwest Resident on Thu, 16th Oct 2014 9:39 am 



rockman — Clear as mud! Actually, clearer than that…

So, what the hell do you think SA is doing? What’s your best wild-assed speculation as to why they would come out with this major announcement? Are they bluffing? Just looking to sow confusion and dismay throughout the market? Just goofing around?

louis wu on Thu, 16th Oct 2014 12:55 pm 



Someone to blame when the shale game goes bust maybe.

rockman on Thu, 16th Oct 2014 12:55 pm 



NR – All I can do is make unsupported speculation like everyone else. I think the KSA is imply reacting in a manner that benefits them. As I made my point the KSA didn’t drive the price of oil down… the refiners did to their expectations of a soft market for their product. All the KSA can do is react to thy dynamic: Their only options IMHO: decrease production or maintain/increase production. And I’ll assume that decision will be based upon maximizing revenue. As has been pointed out the KSA reducing their production in the mid 80’s allowed other OPEC to sell their oil at a higher price while KSA revenue slowly slipped into the toilet.

I think they’ve learned from that lesson: they are doing what they can to max revenue: selling as much oil possible at the current market price. I know that seems simplistic and doesn’t fit the conspiracy theory focus of some folks. But does it need a more convoluted explanation? Look again at the numbers I posted: at the current “cheap” oil price the KSA will receive more revenue then they did just 4 years ago. Even though prices were about that same at that time they are producing about 1.5 million bopd now then they were then. So even though prices have fallen to what they were 4 years ago the KSA will bring in $40 BILLION MORE IN A YEAR then they did back then.

I continue to be amazed that some folks feel that $80/bbl oil is some great hardship for the KSA. Sure, I wish I could get $100/bbl for the production of one of my wells currently making 400 bopd. But I’ve already recovered 100% my cost and the well will still net me $7.8 million per year at $80/bbl.

So feel free to start shedding tears for the Rockman and the KSA now. Or maybe those tears will be the result of us still slowly twisting your balls in a vice grip. LOL.

Again, it’s not personal… just business.

Northwest Resident on Thu, 16th Oct 2014 1:16 pm 



rockman — Thanks as usual for the feedback and info. The oil business — what an amazing thing it is! Never a dull moment…

Makati1 on Thu, 16th Oct 2014 7:56 pm 



Well, I agree that we don’t know exactly what is happening or why, just as we don’t really know what actual ‘reserves’ the oil countries have. Lying is also “just business’.

I see the end of oil sands and fraking oil if they can keep the price low enough, long enough. Bankrupt their competition in today’s economy and it is gone for good. Maybe that is the goal? But it could bring down the world economy too and cut oil demand in half or more. Also not good for the producing countries that need the revenue. Interesting play. Waiting for the final act.

rockman on Thu, 16th Oct 2014 11:21 pm 



M – “I see the end of oil sands and fraking oil if they can keep the price low enough, long enough.”. I agree with you but to a degree. Each drilling prospect is subject the its individual economic analysis. There are projects (shale, conventional, Deep Water, etc.) that require $100/bbl. Others that require only $80/bbl. And still others that require only $50/bbl. Obviously there will be more wells of all categories drilled as prices increase. But this has been the driving dynamic in the oil patch from its earliest days. And all plays are bubbles (even the huge carbonate fields of the ME) and eventually burst.

The biggest problem today is the nature of the shale plays that have dominated the US production increases. They don’t have the sustained production life of conventional reservoirs of decades past. There’s little likelihood anyone will discover another Ghawar Field. Yet after all these decades it still produces a significant amount of oil. Oil prices always have retreated for a variety of reasons…and always will. And have increased eventually. I see no reason to expect the cycle to not continue.

But the game is very different today on at least two counts IMHO. First, the increase demand and purchasing power of developing nations like China and India. Second, there are hard and well defined limits where oil/NG reserves can physically exist. Note I didn’t say limits to where they can be drilled but actually exist. Consider the “new” Deep Water fields in the GOM. Over 4 decades ago there was seismic indications that hydrocarbon potential exited out there. Speculation and far from proof. But the geologic possibility existed. What was lacking then was the engineering capability of developing fields in water depths greater the 600′. But that changed in time.

But today we are developing the last of those known petroleum provinces. The vast majority of the oceans have been proven to have no commercial hydrocarbon potential. Consider that the current surge in US production is coming from petroleum provinces that were proven to exist more than half a century. The EFS and Bakken formations were producing over 50 years ago. Not a lot but were known and being drilled. And greatly expanding now thanks to new tech AND higher oil prices. But they ARE NOT newly discovered regions of hydrocarbon potential.

And that’s the big difference in this cycle: no one has identified a single new petroleum province…not one. All the chatter about future production is about prices/tech allowing known basins to be exploited. For instance the hydrocarbon potential of the Arctic Basin as been known for years. What still isn’t known is how large that potential may, or may not, be.

No tech or high price will allow oil/NG to be produced from regions where they do not exist. I’ve not seen anyone make an estimate of the actual size but the vast majority of the total area of the planet does not obtain the components needed to create commercial hydrocarbon traps.

Nony on Fri, 17th Oct 2014 6:46 am 



I wonder if the discovery thing is overdone. I mean, yeah…we may not be finding all new fields. But if we learn more about them so we understand they are bigger (e.g. Price with the Bakken) or if we learn how to get more out of them…that might have the same impact as finding a new field. So if I can get another 10% out of a 10 billion barrel deposit, it’s the same benefit as finding a new 1 billion barrel find. The customer doesn’t care the difference as long as the oil has the quality he needs and a price he accepts (and the market sets that).

Oil in place in the Bakken-TF is ~400 billion barrels. Recoverable oil (current prices, technologies) is estimated at ~10 billion barrels by USGS. There’s a HUGE amount of oil (390) that is being left in the ground. Maybe we never figure out how to get it out. Maybe we do. Donno. But that is where future production is likely to come from. Not “new provinces”. Although there will be a few new provinces (ANWAR, offshore non-GOM, etc.)

Davy on Fri, 17th Oct 2014 7:44 am 



NOo, nope, sorry, it is not overdone because technology is hitting diminishing returns and capex is compressing. You are now currently seeing what oil deflation will do to production. NOo, give it up man and join the PO band wagon. Get out of that lifestyle you are in and get into dooming and prepping. The doomer brigade here has given you so many pointers. Embrace our attitudes and lifestyles and it will pay off handsomely.

rockman on Fri, 17th Oct 2014 9:05 am 



Davy/None – This is awkward: I agree with both of you. LOL. No new significant oil plays left but a lot of known oil/NG left to produce… if the price is high enough. The Haynesville Shale gas is a good example: a drilling boom…when prices were heading north of $8/mcf. Some drilling today but far from significant. But the amount of producible NG gas not changed. It’s still there and will be produced one day… when prices rebound.

And thus the dynamic that should be obvious to everyone by now: the amount of oil/NG left to produce is not so much dominated by geology but by pricing. And now we’ve gotten a clear message lately that pricing is controlled by economic activity.

Some might disagree but I don’t think the KSA driven down the price of oil. IMHO the anticipated slow down in economic activity as perceived by the refiners did not justify their paying the higher oil prices. The oil buyers don’t make purchases based upon the price of oil but the anticipated profit margin. Folks need to look back at the recent changes in motor fuels. So bit of chicken vs egg dynamic but it seems fuel prices were on a don trend before we started to see the oil price slide. Remember the fuel being sold today was cracked from oil that was purchased weeks if not months ago. Just as the KSA doesn’t set the price for oil ExxonMobil doesn’t set the price for gasoline… the consumers do. The gasoline made from cheaper oil refiners buy this month won’t end up at the stations for some time.

And not just US gasoline prices taking a hit. For some time there have been more stories about the growing softness in the global diesel market. Regardless of all the conspiracy theories in the end consumer demand drives the price of refined products. And the anticipated price of refined products determine the price of oil. The only control the oil exporters have over their revenue stream is how much oil they sell. And given that almost every oil exporter has been producing at max rate the can’t increase production to offset the price decline. But the KSA may have some extra capacity. But more important they can at least maintain production levels to max their revenue. Which is exactly what they are doing: IMHO they aren’t pushing all that oil into the market place to drive prices down but are doing it BECAUSE of the low prices.

Which takes us full circle back to reserves and future production. We know where most of the oil/NG remains. IMHO we’ve reached the final phase of the hydrocarbon age: future production will primarily be controlled by pricing and not geology. And pricing will be controlled by economic growth. But energy pricing will moderate economic growth.

And thus the future as I see it.

JuanP on Fri, 17th Oct 2014 9:43 am 



Rock, I agree that it is very likely that cash flow is the main concern for KSA, keeping their market share may be a concern, too. Lower prices also make things tough for some of their competitors by lowering investments in future high cost oil production, which benefits KSA in the future, too.

JuanP on Fri, 17th Oct 2014 9:45 am 



It seems that at $100 per barrel, the world can produce more oil than it can afford to buy at this time.

Davy on Fri, 17th Oct 2014 9:52 am 



Rock the difference with you and I is I talk out of my ass and you talk from experience. That should be enough said on my part.

marmico on Fri, 17th Oct 2014 11:20 am 



So if I can get another 10% out of a 10 billion barrel deposit, it’s the same benefit as finding a new 1 billion barrel find

Did you see the real time Peakoil.com tweet from Grealy?

Cumulative production from 1880 in the La Brea tar pits is 20 times the estimated 2008 reserves.

GregT on Fri, 17th Oct 2014 2:14 pm 



On the other side of the equation, we still have overpopulation, environmental degradation, ocean acidification, climate change, species extinction, and loss of biodiversity. Each of which alone, is a threat to human comfort. Put together, they are a threat to human existence.

The Economy, or the Environment? Tough choice, until one comes to the realization that the Economy is also dependant on a healthy natural Environment, as is life itself.

Northwest Resident on Fri, 17th Oct 2014 2:18 pm 



GregT — That’s what I think of as the “Perfect Storm”. It’s heading our way fast, no force on earth can stop it. Get your umbrella ready!