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Wednesday, January 14, 2015

Forbes: Saudi Arabia Making a $750 Billion Bet by Pushing Down Oil Prices


From Forbes:
With Brent crude oil falling on Monday below $54 a barrel for the first time in more than five years, it is clear that Saudi Arabia is making a massive $750 billion bet in 2015 that the oil kingdom can endure lower oil prices longer than other major oil producing countries both within and outside OPEC, even including American shale. 
A flood of new oil from U.S. shale producers and Canadian tar sands companies coupled with softening demand from China may have set the stage, but Saudi Arabia is now firmly driving the process that has seen oil prices plunge in a matter of months. Starting in October, Saudi Arabia indicated to global markets that it would not materially cut production alone and would restrain itself from cutting production unless other major oil producing countries also joined in such an effort. 
“The most important thing for the Saudis is market share,” says Prof. F. Gregory Gause, a Saudi expert at Texas A&M University. “They are not going to sacrifice it, they will play chicken with other producers, whether Iranian or American shale producers, in order not to lose market share and the only way they will cut production is if they get an agreement with a broad array of OPEC and non-OPEC producers to take a fair amount of oil off the market.” 
Saudi Arabia’s move is inflicting pain on the energy-based economics of countries like Iran and Russia, and big national oil companies ranging from Russia’s Rosneft to Brazil’s Petrobras , which saw its shares fall another 8.4% on Monday. Big U.S. shale producers saw their shares take another hit on Monday. Shares of Continental Resources CLR +2.4%, for example, fell by 12%. Companies engaged in offshore drilling also got hit, like Transocean , whose stock fell by another 7% on Monday. Transocean’s stock has plunged by 65% in the last year.
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