Six months ago, OPEC, led by Saudi Arabia, announced a surprising decision to counter rivals’ energy production. Instead of cutting back on oil production to match global demand, member states would hold steady.
The bet was that by flooding the market, global prices would plunge, and more high-priced competitors would be forced to respond. The main target, US shale companies, would hopefully collapse as they were forced to cut spending.
Six months later, the plan seems to be working.
"There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including US shale, deep offshore and heavy oils," a Saudi official told the Financial Times in Riyadh.
Last June, oil was going for $115 a barrel. By January, those prices had plummeted to just $45 a barrel, which is a pretty tantalizing amount for investors.
On Wednesday, the International Energy Agency released data which seems to back up Saudi Arabia’s claim. The number of operating rigs in the United States has dropped by 60% due to the excess supply in the global market, which means a lot of OPEC’s competitors are struggling to stay afloat.
"Saudi Arabia wants to extend the age of oil," the official said. "We want oil to continue to be used as a major source of energy and we want to be the major producer of that energy."
True to their word, Saudi Arabia’s production reached a record high of 10.3 million barrels of oil per day, and officials haven’t shown any sign of slowing that output.
Oil is currently selling at $68 a barrel, and despite IEA projections that the rise will likely continue, the Saudi official insisted that oil prices had "reached a bottom" and it "doesn’t look like it is going back."
US shale companies, for their part, would likely deny the claim that Saudi Arabia has choked them out of the business. EOG Resources, America’s largest producer, predicts massive growth, and is about to reopen many of its downed rigs.
"US supply could quickly rebound in response to the recent recovery in prices," Tom Pugh, a commodities economist with Capital Economics, told the Wall Street Journal. "Based on the historical relationship with prices, the fall in the number of drilling rigs already looks overdone, and activity is likely to rebound over the next few months."
Still, the US Energy Information Administration has predicted that US shale production will drop by 86,000 barrels next month, meaning the oil wars could continue for a long time yet.
