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What is behind the fall in oil prices? A stronger dollar? More domestic production? Slower global economy?
Saudi's quest to stay top dog in the oil business. That is the sole driver of lower prices.
And Saudi is sitting on plenty of money to let this go on until the US falls back.
I wouldn't really describe *this* price fall as OPEC price manipulation, so much as a decision by OPEC not to limit production. Oil has not been a free market in decades. They are certainly going after shale production, and the Saudis, at least, probably see Russian pain as beneficial.
That's how they manipulate it. I read an interesting article about the Saudis, which said that although it costs them only $2.00 per barrel to get oil out of the ground, they still need the price to be around $90.00, because of the way they spend / allocate their money. They have made way too many commitments, and now they are looking at a situation where their own oil games might cause them to fail to meet those obligations. I think US is going to win this price war. As a matter of fact, things might change a lot in near future.
That's how they manipulate it. I read an interesting article about the Saudis, which said that although it costs them only $2.00 per barrel to get oil out of the ground, they still need the price to be around $90.00, because of the way they spend / allocate their money. They have made way too many commitments, and now they are looking at a situation where their own oil games might cause them to fail to meet those obligations. I think US is going to win this price war. As a matter of fact, things might change a lot in near future.
It's hard to call it manipulation when that has been the state of affairs for decades. And actually, if markets were free, then the price would likely be lower as there would never be production cuts. Deciding not to cut production is deciding to distort the market less.
I read the article you are referring to, and it has substantial flaws in failing to understand Saudi internal politics. It is certainly true that the Saudis use government spending, supported ultimately by oil wealth, to minimize dissent. But to argue that the Saudis need $90 oil to maintain their grip on power fails to understand the sophistication and foresight of the Saudi regime. Temporarily allowing the price of oil to fall by not limiting production has short-term impacts on the government's balance sheet, but it can shore up those impacts with debt (ultimately backed by the country's vast oil reserves and its alliance with the United States).
Saudi Arabia currently has a balanced budget, spending about $225 billion annually. Outstanding debt is only ~$20 billion. Annual GDP is ~$730 billion, of which the oil sector is around 93% (government receipts from oil are around 75% of total government receipts).
Saudi Arabia can produce about 9,650,000 barrels of oil per day (it can refine a little over a quarter of that number daily).
Here is a nice chart showing Saudi actual production vs. oil prices:
You can see that back in 2005, Saudi Arabia was exporting ~9 million barrels per day at a price around $55. Total receipts would thus be on the order of $495 million per day or $180,675,000,000 in a year.
In 2010, when the Saudis cut exports to just over 7 million barrels per day, the price was ~$80 per barrel. Total receipts would be on the order of $560 million per day or $204,400,000,000 in a year.
Assuming that the $2/barrel break even price is correct, then we see total profits of ~$475 million per day under the 2005 production/price and ~$545 million per day under the 2010 production/price.
Of course, global energy demand has risen since 2005, so the same amount of production would have a higher price. Let's assume Saudi Arabia continues to export around 8.6 million barrels per day and the price holds around $75/barrel. The country would see total receipts on the order of $645 million per day or $235,425,000,000 per year--more than it generated exporting 7 million barrels at $80 per barrel. (still ~$625 million per day assuming $2/barrel production cost. The price would have to fall to $65 and change per barrel for total receipts to fall as low as 2010.
And the cost of debt is important, in case Saudi Arabia wants to use debt to shore up its budget. 1 year Saudi treasury notes pay ~0.58% interest. That is cheap debt. Six month notes pay about 0.46%.
That's a lot of information, but I think the central point is that Saudi Arabia can afford an extended price war with the shale producers without taking much of a public finance hit at all. And there is literally no other country as well-situated as Saudi Arabia to weather falling prices in the oil markets. Oil by country - Wikipedia, the free encyclopedia
OPEC price manipulation. They are trying to make US oil production unprofitable. It worked last time, but I doubt it will work this time. It's hurting mother Russia more than anyone.
That's just the irony... OPEC will probably fail, because they're really not that cohesive of a cartel and their members stand a lot to gain by cheating, but it would actually be GOOD for the USA if they succeeded in continuing their attack on US oil production... because it REALLY helps the West in its standoff with Putin. US oil production can take it as continued technological progress enables a lower cost of production...so let's keep that OPEC supply coming!!
It's hard to call it manipulation when that has been the state of affairs for decades. And actually, if markets were free, then the price would likely be lower as there would never be production cuts. Deciding not to cut production is deciding to distort the market less.
I read the article you are referring to, and it has substantial flaws in failing to understand Saudi internal politics. It is certainly true that the Saudis use government spending, supported ultimately by oil wealth, to minimize dissent. But to argue that the Saudis need $90 oil to maintain their grip on power fails to understand the sophistication and foresight of the Saudi regime. Temporarily allowing the price of oil to fall by not limiting production has short-term impacts on the government's balance sheet, but it can shore up those impacts with debt (ultimately backed by the country's vast oil reserves and its alliance with the United States).
Saudi Arabia currently has a balanced budget, spending about $225 billion annually. Outstanding debt is only ~$20 billion. Annual GDP is ~$730 billion, of which the oil sector is around 93% (government receipts from oil are around 75% of total government receipts).
Saudi Arabia can produce about 9,650,000 barrels of oil per day (it can refine a little over a quarter of that number daily).
Here is a nice chart showing Saudi actual production vs. oil prices:
You can see that back in 2005, Saudi Arabia was exporting ~9 million barrels per day at a price around $55. Total receipts would thus be on the order of $495 million per day or $180,675,000,000 in a year.
In 2010, when the Saudis cut exports to just over 7 million barrels per day, the price was ~$80 per barrel. Total receipts would be on the order of $560 million per day or $204,400,000,000 in a year.
Assuming that the $2/barrel break even price is correct, then we see total profits of ~$475 million per day under the 2005 production/price and ~$545 million per day under the 2010 production/price.
Of course, global energy demand has risen since 2005, so the same amount of production would have a higher price. Let's assume Saudi Arabia continues to export around 8.6 million barrels per day and the price holds around $75/barrel. The country would see total receipts on the order of $645 million per day or $235,425,000,000 per year--more than it generated exporting 7 million barrels at $80 per barrel. (still ~$625 million per day assuming $2/barrel production cost. The price would have to fall to $65 and change per barrel for total receipts to fall as low as 2010.
And the cost of debt is important, in case Saudi Arabia wants to use debt to shore up its budget. 1 year Saudi treasury notes pay ~0.58% interest. That is cheap debt. Six month notes pay about 0.46%.
That's a lot of information, but I think the central point is that Saudi Arabia can afford an extended price war with the shale producers without taking much of a public finance hit at all. And there is literally no other country as well-situated as Saudi Arabia to weather falling prices in the oil markets. Oil by country - Wikipedia, the free encyclopedia
Yes, they could finance their obligations by debt. Actually the fiscal break-even for Saudi Arabia is $98, not $90.
Saudi's quest to stay top dog in the oil business. That is the sole driver of lower prices.
And Saudi is sitting on plenty of money to let this go on until the US falls back.
And it seems to be working too.
Like a charm.
They're letting it be known who the real bosses are in the oil business.
And if it wasn't clear before, it damn sure is now.
Yes, they could finance their obligations by debt. Actually the fiscal break-even for Saudi Arabia is $98, not $90.
Nobody knows the "fiscal break-even" for Saudi Arabia. There are many assumptions made, including a $2-3 per barrel production cost. This $90-$98 break even point depends on assumptions about Saudi government spending and finance, currency fluctuations, as well as assumptions about long-term global energy demand and supply. The Reuters estimate I've seen pegs fiscal break even at $92 for Saudi Arabia--an estimate that expects oil to cover government spending and for government spending not to change. Of course, changes in fiscal policy and the use of debt finance would thus change the "fiscal break even" point.
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