 “They want to prove to the world that they’re still in control,” energy analyst
Dan Steffens, president of the Energy Prospectus Group in Houston, told
Watchdog.org.
The price of a barrel of oil has plunged nearly 40 percent since late June, and
since Thanksgiving the drop in gasoline prices has accelerated so fast that some
areas of the country may soon see the price dip below $2 a gallon.
AP Photo
AP Photo
THE SAUDI SQUEEZE PLAY: OPEC leader Saudi Arabia appears to be trying to put
pressure on U.S. shale oil producers in an attempt to protect its share of the
global market.
Using horizontal drilling and hydraulic fracturing, U.S. oil producers in places
like the Bakken formation in North Dakota, Pennsylvania’s Marcellus shale and
the Permian Basin in West Texas and eastern New Mexico have spearheaded a more
than 30 percent boost in U.S. oil production in recent years.
The increased supply has driven down the cost of a barrel of oil and put the
squeeze on Saudi Arabia and the other 11 members of the Organization of
Petroleum Exporting Companies, known as OPEC.
In a meeting Nov. 27 in Vienna, despite pleas from some OPEC members to cut
production to bring global prices back up, the Saudis announced they would keep
on pumping, presumably to protect their market share. The strategy? Keep prices
on a downward trend and apply pressure on the U.S. upstarts.
“They wanted to show the other OPEC members they’re still the kingpin,” Steffens
said in telephone interview.
“We call it the OPEC, or the Saudi Arabia shakeout,” Thomas Watters, managing
director for Standard & Poors Ratings Services told Bloomberg News. “They’re
clearly targeting the North American shale producers.”
Saudi Arabia is still the largest producer of crude oil in the world, but the
U.S. has been giving the Saudis a run for their money. In the past four years,
American producers have completed an estimated 10,000 new wells — more than 10
times what the Saudis have completed — and the U.S. output of almost 9 million
barrels a day is just 1 million barrels short of what Saudi Arabia produces.
OPEC nations — and Saudi Arabia in particular — have realized that “this boom in
the United States is not a bubble that’s going away,” energy analyst and author
Daniel Yergin told CNBC just prior to the Thanksgiving OPEC meeting.
It seems the Saudis’ strategy is to keep pumping and starve shale producers in
the U.S., many of whom will be severely tested as the global price keeps
dropping. On Thursday, benchmark U.S. oil prices fell below $60 a barrel for the
first time since July 2009.
“You’ll see people trimming their budgets back,” Steffens said.
It’s already happened, with drill permits dropping in four of the major shale
“plays” across the country:
[to top of second column] |
 Source: Michael Fitzsimmons, Seeking Alpha website
Smaller producers who carry relatively high amounts of debt are
particularly vulnerable.
But the Saudi power play comes with some risk.
First, the economies of OPEC members Venezuela, Nigeria and Iran are
dependent on high oil prices. Their economies are a mess, and
they’re angry with the Saudis’ decision to keep prices low.
And second, while Saudi Arabia’s oil resources are deep, there’s
some question about whether the kingdom can hold out as long as some
experts expect.
“I think they were thinking, this (U.S. oil production) wasn’t
really a threat before but now we do think it’s a threat,” Steffens
said. “And if we don’t nip it in the bud now, it’s going to be more
painful later.”
Over the weekend, OPEC secretary general Abdullah al-Badri denied
the organization was out to get U.S. shale producers. “Some people
say this decision was directed at the United States and shale oil,”
Badri said through an interpreter while speaking to a Kuwaiti news
agency. “All of this is incorrect. Some also say it was directed at
Iran and Russia. This also is incorrect.”
Can the U.S. shale producers hold out?
“I don’t think we’ll see a decline in production. What we’ll see is
a flattening,” Steffens said. “(Production) went up a million and a
half barrels a day this year. Well, it will probably cut that in
half next year.”
But in the long run, Joseph Dancy, investment partner at
Dallas-based LSGI Advisors Inc., insists the shale industry will
survive.
“We’re in the first inning of a nine-inning game,” Dancy said. “Even
if there is a slowdown, the oil is still in the ground and the
technology to extract it is getting better and better.”
The Saudi-U.S. showdown figures to be a test of nerves at the
highest economic level, but for now drivers can keep enjoying low
gas prices.
As pointed out in the The Economist magazine, the typical American
motorist spends about $3,000 a year at the pump. The recent price
drop translates into about an $800 savings — the equivalent of a
2-percent pay raise.
Rob Nikolewski is the National Energy Corrrespondent for
Watchdog.org. He is based in Santa Fe, N.M. Contact him at
rnikolewski@watchdog.org and follow him on Twitter @NMWatchdog.
[This
article courtesy of
Watchdog.]
Click here to respond to the editor about this
article. |
