As Saudi Arabia Battles Its Oil Rivals, Prices Are Expected To Stay Low | KERA News

As Saudi Arabia Battles Its Oil Rivals, Prices Are Expected To Stay Low

Dec 3, 2015
Originally published on December 3, 2015 7:07 pm

As the world's oil producers gather in Vienna, they are all hurting from prices that crashed a year ago and are hovering at a little over $40 a barrel. One country, Saudi Arabia, could probably drive up prices if it wanted to cut its production.

But the Saudis appear willing to endure the pain rather than make a move that would help rivals like Iran and Russia.

One of the key reasons oil is cheap today is a decision made by the Saudi and other OPEC countries one year ago. There was a massive increase in supplies, thanks in large part to shale oil production in the U.S., says Jason Bordoff, director of Columbia University's Center on Global Energy policy.

"Production in the U.S. was growing over 1 million barrels per day per year, it was a huge growth, the largest multi-year growth of production of any country in history," he says.

In the past when there was too much supply leading to low prices, Saudi Arabia, the world's largest oil producer, would step in and slow the spigot which in turn would raise the world price for everyone.

But last year OPEC said forget it. Why should it help out the competition? The Saudis decided to keep production rates as they were even if it meant oil prices would stay low.

Jim Krane, an energy specialist at Rice University's Baker Institute, says that policy is unlikely to change when OPEC meets Friday in Vienna.

"I think that the Saudis and their Gulf allies are going to stick to their guns and basically keep production unchanged," he says.

Pain Throughout OPEC

But Krane says the policy is hurting some OPEC members who rely heavily on oil revenues to balance their budgets.

"OPEC's poorer members like Algeria, Nigeria, Venezuela, they've been making these increasingly desperate calls for production cuts to try to get the price back up," he says.

Columbia's Bordoff, who was an energy adviser to President Obama, says Saudi Arabia has vast cash reserves and can wait it out. But even the Saudis are feeling the pinch of low oil prices.

"The Saudis can weather this, but even for them it's been incredibly costly," he says. "I mean over 100 billion dollars in reserves that they've had to draw down, at a time when they're engaged in a costly conflict next door in Yemen and have a host of other support they need to provide to their people."

Greg Priddy, director of Global Energy and Natural Resources at the Eurasia Group, says Saudi Arabia is likely to stay the course because of long-term strategic interests.

One of those is beating back its non-OPEC competitors, such as Russia. American production has been hit hard as well. It's down about 500,000 barrels a day from its peak a year ago. Priddy says it's been particularly tough for those involved in the more costly shale industry.

"I think what some of the OPEC producers, including the Saudis, had hoped was that it would buckle pretty rapidly. And it hasn't," he says.

Greater Efficiency In The U.S.

Priddy says the OPEC policy forced many U.S. producers to improve technique, cut costs and increase efficiency.

"So under that pressure they've proven to be very resilient, improving their business practices very rapidly," he says.

Saudi Arabia's other major concern is geopolitical. Most sanctions on its regional rival Iran are expected to be lifted some time next year — which could release an additional 1/2 million to 1 million barrels of oil a day onto the global market.

Brenda Shaffer, an energy specialist at Georgetown University, says Saudi Arabia believes cutting production to raise prices would only help its rivals.

"Iran, who is little by little going to be re-entering the market, would benefit. Russia would benefit. North America would benefit. But Saudi Arabia wouldn't get any benefit out of it," Shaffer says.

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ROBERT SIEGEL, HOST:

That cheap gasoline you've been filling up on looks like it'll remain a bargain. There's no sign that producers are going to raise prices at tomorrow's OPEC meeting in Vienna. NPR's Jackie Northam reports.

JACKIE NORTHAM, BYLINE: One of the key reasons why gas is cheap is today is because of a decision made by OPEC one year ago. At the time, there was a massive use in oil supplies, thanks in large part to Shell oil production in the U.S., says Jason Bordoff, director of Columbia University's Center on Global Energy Policy.

JASON BORDOFF: Production in the U.S. was growing - over 1 million barrels per day, per year. It's a huge growth, the largest multi-year growth in production of any country in history.

NORTHAM: In the past, when there was too much supply leading to low prices, Saudi Arabia would step in and slow production, which in turn would raise the price. But last year, OPEC said, forget it - why should it help out the competition? - and decided to keep production rates as they were, even if it meant falling oil prices.

Jim Krane, an energy specialist at Rice University's Baker Institute, says that policy is unlikely to change at tomorrow's meeting.

JIM KRANE: I think that the Saudis and their Gulf allies are going to stick to their guns and keep production unchanged.

NORTHAM: But Krane says the policy is hurting some OPEC members who rely heavily on oil revenues to balance their budgets.

KRANE: OPEC's poorer members, like Algeria or Nigeria, Venezuela, they've been making these increasingly desperate calls for production cuts to try to get the price back up.

NORTHAM: Columbia's Bordoff, who was an energy adviser to President Obama, says Saudi Arabia - the largest producer in OPEC - has vast cash reserves and can wait it out, but even it is feeling the pinch of low oil prices.

BORDOFF: The Saudis can weather this, but even for them it's been incredibly costly - I mean, over a hundred billion dollars in reserves that they've had to draw down at a time when they're engaged in a costly conflict next-door in Yemen and have a host of other support they need to continue to provide to their people.

NORTHAM: Greg Priddy, director of global energy and natural resources at the Eurasia Group, says Saudi Arabia is likely to stay the course because of long-term strategic interest. One of those is beating back its non-OPEC competitors, such as Russia and the U.S. American production has been hit hard, down about 500,000 barrels a day from its peak a year ago. Priddy says it's been particularly tough for those involved in the more costly shale fracking industry.

GREG PRIDDY: And I think what some of the OPEC producers, including the Saudis, had hoped was that it would buckle pretty rapidly, and it hasn't.

NORTHAM: Priddy says the OPEC policy forced many U.S. producers to improve technique, cut costs and increase efficiency.

PRIDDY: So under that pressure, they've proven to be very resilient at improving their business practices very rapidly.

NORTHAM: Saudi Arabia's other major concern is geopolitical. Sanctions on its regional rival, Iran, are expected to be lifted sometime next year, which could release an additional half a million to 1 million barrels of oil a day onto the global market.

Brenda Shaffer, an energy specialist at Georgetown University, says Saudi Arabia believes cutting production to raise prices would only help its rivals.

BRENDA SHAFFER: Iran, who's little by little going to re-enter the market, would benefit. Russia would benefit. North America would benefit. But Saudi Arabia wouldn't get any benefit out of it.

NORTHAM: And whichever way Saudi Arabia goes, so too does OPEC, which means the price at the gas pump could very well stay low. Jackie Northam, NPR News, Washington. Transcript provided by NPR, Copyright NPR.