February 10, 2016
With oil prices at record lows, Saudi Arabia is wagering on different strategies in order to raise the revenue necessary to meet their obligations and maintain their position as the largest OPEC producer. Despite surpluses causing continued declines in oil prices, Saudi Arabia, the largest of the OPEC producers, shows no indication of cutting production. The OPEC giant has cut subsidies, announced plans to raise taxes, and is pulling revenue from savings in order to stay afloat, all of which could have the country facing difficult economic times sooner rather than later.
Saudi Arabia, which relies almost entirely on revenues from oil production, is running on budget deficits in order to meet financial obligations. With crude oil prices around just USD 30 per barrel, the Saudi government has been tapping into their foreign currency reserves. These reserves declined about USD 1 billion in 2015 alone- from USD 720 billion early in the year to USD 620 billion in December, according to Michael McDonald of oilprice.com. If the price of oil doesn’t increase, McDonald claims that the country may be out of foreign currency reserves in less than three years.
Despite this startling outlook, Riyadh refuses to cut production in order to balance some of the market oversupply. This is a long-term strategy in the hopes that demand for oil will stay high and in effort not to lose their position as the world’s largest OPEC producer. Saudi Arabia is concerned about other energy sources, primarily unconventional shale oil. With some of the lowest production costs per barrel, the Saudis hope that low oil prices will put North American shale oil producers out of business says John Schoen, a journalist with CNBC.com. Shale oil, which relies on expensive technologies, is only profitable for producers when crude oil is above USD 50 per barrel. Riyadh is counting on low oil prices as a potential way to forestall a decline in demand. The hope is that if demand stays high, the adoption of alternative forms of energy will be delayed. “The Kingdom is concerned about the rest of the world switching to other energy sources, and sees low oil prices as a way to delay the adoption of substitute forms of energy,” states McDonald.
Essentially Saudi Arabia’s strategy to secure their position as the OPEC giant should become a short-term strategy. Riyadh is only delaying the inevitable and they may have overestimated how long they can withstand low oil prices. The Saudis need to consider that even if they manage to force North American shale producers out of market share, shale oil technology isn’t going anywhere, and neither is its threat to conventional oil producers.
John W. Schoen, 2016. Producers keep pumping, even with oil prices falling. CNBC.com. February 5, 2016. http://www.cnbc.com/2016/02/05/producers-keep-pumping-even-with-oil-prices-falling.html.
Michael McDonald, 2016. Is The Saudis market share strategy still feasible? Oilprice.com. February 2, 2016. http://oilprice.com/Energy/Energy-General/Is-The-Saudis-Market-Share-Strategy-Still-Feasible.html.