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Saudi Arabia’s chest-beating is unconvincing

Oil prices fell yesterday after Abdalla El-Badri, secretary-general of OPEC and Ali al-Naimi, Saudi Arabian oil minister effectively ruled out curbs in supply.  However, Ali al-Naimi’s comment that Saudi Arabia can live with an oil price as low as $20 per barrel has been treated with some scepticism.

While it is true that oil extraction costs in the Middle East are among the lowest in the world (Iran can produce oil for as little as $10 per barrel) this is only the cost at the well head.  The true break-even price for Saudi Arabia is more likely to be somewhere between $80 and $90 a barrel because of the social programmes, military spending and the lavish lifestyles of the Saudi royal family that depend upon oil.  The sustained fall in oil prices since 2014 has forced Saudi Arabia to eat into its $600 billion sovereign wealth fund, and even to consider selling shares in Saudi Aramco, the state oil company.

What is true for Saudi Arabia is, of course, true for everyone else.  While some US shale oil companies claim to be able to get oil out of the ground for less than $50 per barrel, they need to sell it at more than $60 just to service the borrowing that allowed them to open up the shale plays to begin with.  In the USA, local, state and federal government budgets have also been set on the understanding that they will enjoy a steady income stream from oil.  In the UK, what remains of the oil and gas industry in the North Sea is currently not only unable to provide the government with taxes, but is begging for subsidies and tax exemption… at least until prices rise once more.

So everyone is hurting, and someone is going to have to eat the losses.  The stakes are high.  If US shale loses, the US economy will be plunged into recession.  Indeed, some fear that if all of the shale debts were to go bad at the same time, it could trigger a financial crisis like the sub-prime mortgage bust in 2008.  If, on the other hand, the Saudis blink first, they risk Arab-Spring type internal unrest and the possibility of the overthrow of the regime itself (consider that while Saudi Arabia is a predominantly Sunni country, almost all of the oil is beneath the areas where the Shia minority live).

For the rest of us, temporary savings on transport are likely to be balanced by increased taxation and cuts in public spending as governments seek to balance the books; followed – probably in 2017 – by some spectacular increases in the price of what is left of the recoverable oil.

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