Saudi Clout Means No Relief for Oil Companies: UMD Energy Economist

COLLEGE PARK, Md. ­- The price of crude oil dipped below $40 for the first time since 2009 this week, a sign of the relentless pressure on oil companies caused by high global output. That followed a decision last Friday by OPEC not to decrease output, with Saudi Arabia and its Gulf allies outvoting Venezuela, Ecuador and others who think the price needs to come up to better balance the interests of suppliers and consumers.

Veto power: Many investors, who anticipated a production decrease, had underestimated the Saudis’ commitment to maintaining high output. “Everyone figured, ‘It’s time,’ but the Saudis are sticking to their position,” says professor and energy economist Charles E. Olson at the University of Maryland’s Robert H. Smith School of Business. Investors also seem to have overestimated the clout of countries like Venezuela in OPEC. “They listened to everybody except the country that matters, Saudi Arabia,” Olson says.

Chemo side effects: Some observers have compared Saudi policy to chemotherapy: Saudi Arabia inflicts damage on itself, but the policy fends off threats to that country’s oil-centric economy, including U.S. fracking technology — which generally has higher costs than Saudi drilling techniques. The Saudis “think they have to slow down the renewable-slash-other technologies, so they can spread their income over a longer period of time,” Olson says.

Political jabs: The Saudis also have geopolitical goals not shared by all members of OPEC, including keeping Russia and Iran in check.

American ingenuity: More than 250,000 people have lost their oil industry jobs worldwide in 2015. But one surprise, Olson says, has been how much efficiency U.S. companies have wrung out their wells.  The number of rigs has dropped 60 percent, for instance, but oil production has fallen by just 3 percent.

No Relief In Sight For Oil Companies

SMITH BRAIN TRUST — The price of crude oil dipped below $40 for the first time since 2009 this week — a sign of the relentless pressure on oil companies caused by high global output. That followed a decision last Friday by OPEC not to decrease output, with Saudi Arabia and its Gulf allies outvoting Venezuela, Ecuador and others who think the price needs to come up to better balance the interests of suppliers and consumers.

Many investors, who anticipated a production decrease, had underestimated the Saudis’ commitment to maintaining high output. “Everyone figured, ‘It’s time,’ but the Saudis are sticking to their position,” says Charles E. Olson, professor of the practice at the Smith School, who has lengthy experience in the energy industry. Investors also seem to have overestimated the clout of countries like Venezuela in OPEC. “They listened to everybody except the country that matters, Saudi Arabia,” Olson says.

There has been much debate about the Saudi strategy, with some observers describing it as analogous to chemotherapy: Saudi Arabia inflicts damage on itself, but the policy fends off threats to that country’s oil-centric economy, including U.S. fracking technology — which generally has higher costs than Saudi drilling techniques. The Saudis “think they have to slow down the renewable-slash-‘other’ technologies, so they can spread their income over a longer period of time,” Olson says. The Saudis also have geopolitical goals not shared by all members of OPEC. Low oil prices punish Russia, for instance, whose meddling in the Middle East the royal family in Riyadh would like to keep in check. The Saudis are also wary of the mischief that Iran could make with the money that flows in once sanctions are lifted on that country; low prices could slow that country’s rebound.

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