As oil prices continue to plummet, Saudi Arabia is signaling to the world oil market it’s willing to settle for much lower oil prices — a possible scheme to slow booming U.S. oil production, according to an exclusive report by Reuters.
OPEC states have been hurting because of falling oil prices due to booming production outside of the oil cartel — much of it from U.S. shale formations. OPEC members, like Venezuela, have been urging the Saudis and others to cut production enough to push oil above $100 a barrel to bolster finances.
But the Saudis have a different idea, reports Reuters. OPEC’s biggest oil producer “will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.” The Saudis are betting that lower oil prices “will be necessary to pave the way for higher revenue in the medium term.”
The idea is that lower prices in the near-term will deter investments and further supply increases in countries like the U.S., according to Reuter’s sources. This means less will be invested in taking oil from shale formations through hydraulic fracturing and from offshore sources.
A risky strategy with few details, but, as Reuters points out, it’s unclear if this will happen at all. Talks of allowing prices to fall further could be a tactic by the Saudis to get other OPEC members to go along with planned supply cuts.
One source told Reuters that “the kingdom does not necessarily want prices to slide further, but is unwilling to shoulder production cuts unilaterally and is prepared to tolerate lower prices until others in OPEC commit to action.”
“Riyadh’s political floor on oil prices is weakening,” Robert McNally, a former White House adviser for President George W. Bush, told Reuters, adding that the Saudis “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the U.S. shale oil sector.”
“Until about three days ago the absolute and total consensus in the market was the Saudis would cut,” McNally said. “The market suddenly realizes it is operating without a net.”
U.S. Oil Production Booms
Saudi Arabia produces 9.7 million barrels a day — about one-third of total OPEC production. The country is the second-largest oil producer in the world, closely tailing Russia which produces 10.6 million barrels day.
But Saudi Arabia’s and Russia’s energy lead is already being usurped by skyrocketing oil and natural gas production from U.S. shale formations. The U.S. has already overtaken Russia as the world’ largest natural gas producer, and oil production is expected to surpass 13 million barrels per day by 2019.
The U.S. is already the world’ largest liquid fuels producer, according to the International Energy Agency. Huge U.S. production gains have led to falling gasoline prices, despite unrest in Africa and the Middle East.
The average U.S. gas price dropped 12 cents in the last three weeks alone to the lowest they’ve been all year, according to a newly released Lundberg survey. Prices hit $3.26 per gallon on October 10, following a steady 16 week decline in prices.
“These have been deep and fast wholesale gasoline price cuts and retailers have yet to pass the entire price cut through,” said the survey’s publisher Trilby Lundberg. “We can expect another several cents at the pump in the next few days,” she said, adding that would change if oil prices were to suddenly rise.”
The U.S. Energy Information Administration expects gas prices to fall further this winter as crude oil prices fall.
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