OPEC’s “Weaponized” Oil Prices

Posted: January 12, 2015 by ShortTimer in Economics, Energy, Middle East

Despite discussing the potential for a bust a couple days ago, I’m not worried about the sky falling yet:

If there ever was doubt about the strategy of the Organization of Petroleum Exporting Countries, its wealthiest members are putting that issue to rest.

Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008. Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want — and are achieving — further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.

See, there’s also the fact that Russia was their primary target:

Vladimir Putin faces a catastrophic shortfall of at least $80bn (£51bn) in oil export revenue over the next year, after Opec kingpin Saudi Arabia signalled there will be no easing in the price war it has launched to recapture market share.

According to US Energy Information Administration (EIA) figures, oil and gas shipments accounted for 68pc of Russia’s total $527bn of gross exports in 2013, when Brent crude – comparable to Russian Urals – traded at an average of $108 per barrel.

US frackers are the secondary target.

And it will take a while to crush them all.

breakeven oil prices bus insdr

Those are older breakeven prices.  There are other figures that say numbers are closer to $50 for Bakken and Permian, and as low as $28 for Marcellus.  Technology has gotten better, American ingenuity has made this development possible (in spite of the current administration), and provided investors don’t totally lose their minds, it would be possible to ease off production while letting the Saudis basically support broader US economic interests due to reduced energy costs.

OPEC thought it had a monopoly.  It didn’t, and now it’s cutting prices to force out the upstart.  Except the upstart doesn’t have to stop, it can just hold those resources as a threat that will ultimately drive the price down for everyone.

I think the only way there will be a true bust is if the US government gets involved.  If it leaves US energy interests alone, they’ll reallocate capital for a while (there will be regional busts where rigs are mothballed), but those rigs will go back active any time the Saudis start getting sad that they can’t buy a new Rolls every month.  They’ll also be there to come back online if the Saudi’s export of Wahhabism that eventually spawned ISIS comes back to bite them in the ass, as the world will look for a more reliable source of oil.

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