Robbins: OPEC's Strategy to Beat Shale Drilling Will Fail
At last month’s meeting of the Organization of Petrolum Exporting Countries ministers in Vienna, some members argued for decreasing production to slow or reverse the oil price drop. But Saudi Arabia, still OPEC’s largest oil producer, convinced the other members of the cartel that their best move would be to keep the spigots open. It is a move that remains under debate this week at an Arab energy conference in Abu Dhabi, United Arab Emirates.
It seems strange that OPEC would be trying to drive oil prices lower. After all, the whole point of the cartel is to use its leverage to maximize profits. But Saudi Arabia’s oil minister, Ali al-Naimi, sees low prices as a new kind of strategic weapon. He believes that oil producing countries need to accept some temporary pain in order to drive down prices to the point where fracking becomes unprofitable, and the newly emerged North American producers start going out of business.
It is a bold gamble on OPEC’s part, and one that is bound to fail. It is true that shale oil production is more expensive than traditional oil drilling. Fracking is unsustainable if oil prices go below $50 or $60 per barrel.
But the break-even points for most OPEC members are much higher. Countries that depend on oil revenue — such as Saudi Arabia, Iraq, Iran and Venezuela — need prices in the range of $100 to $130 per barrel to balance their budgets. Crude oil prices are already in the high $50s or low $60s, and these countries could be facing serious instability while they cut their budgets as they wait for the American producers to go belly up.Read the rest of the article by clicking here.
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