If there ever was doubt about the strategy of the Organization of Petroleum Exporting Countries, its wealthiest members are putting that issue to rest.

Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008. Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want -- and are achieving -- further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.

U.S. crude production totaled 9.13 million barrels a day last week, up about 1 million barrels from a year ago and 49,000 from the OPEC meeting in November. Horizontal drilling and hydraulic fracturing in underground shale rock have boosted output by 66 percent over the past five years. Exports, still limited by law, reached a record 502,000 barrels a day in November, according to the Energy Information Administration.

The four Middle East OPEC members are counting on combined reserve assets estimated by the International Monetary Fund at $826.4 billion to withstand the plunge in prices. Petroleum represents 63 percent of their exports. At least 10 calls and several e-mails to the oil ministries of all four countries on Jan. 7 and yesterday weren’t answered.

OPEC won’t reverse course even if oil prices fall as low as $20 a barrel or non-OPEC countries offer to help with production cuts, Saudi Arabian Oil Minister Ali Al-Naimi said in an interview with the Middle East Economic Survey on Dec. 21. The kingdom may even bolster output if non-OPEC nations do so, he said. The global oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates.

It wouldn’t be the first time U.S. drillers are caught up in an OPEC battle for market share. In 1986, Saudi Arabia opened its taps and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

 

 

David Fuller's view

OPEC’s four leading Sunni states of Saudi Arabia, the United Arab Emirates, Kuwait and Qatar are going for the jugular in this oil price war.  Their main target is the USA, not least as hydraulic fracturing (fracking) is one of the main factors undermining the Saudi-led OPEC control of oil prices, not least as many other countries could and probably will utilise fracking technology in future years.  Sunni countries are also hoping to weaken the growing potential alliance between Shia dominated Iran and Iraq.  Russia is another target, not least as it remains a very big oil producer and has previously used a navel base in Syria’s Mediterranean port of Tartus.  This has been significantly scaled back for security reasons during Syria’s bitter conflict but Putin is still a supporter of Bashar al-Assad.

I maintain that Saudi-led efforts will result in a costly Pyrrhic victory, at best for OPEC, which is losing control.  Technology has enabled more countries to increase oil and natural gas production, by both conventional and unconventional means.  Solar led renewables are becoming more efficient.  New nuclear is increasing (see Eoin’s report on this below).  

Investors are worrying about destructive deflationary problems, which they have certainly seen with Japan since the 1990s and in Europe more recently.  However, these were not caused by technology, which lowers production costs by increasing efficiency.  This creates positive deflation and disinflation.  Oil prices at today’s levels are significant benefit for the global economy.   

(See also this informative article: The world’s biggest winners and losers from cheap oil, in one chart, published by Fortune.)