MOSCOW, October 28 (RIA Novosti) — With oil hovering around the $80-85 per barrel mark, down nearly 30 percent from a high of over $115 in mid-June, media and expert analysis about the causes and consequences of the price decline has been extensive. We present another, Russia-informed perspective.
Saudi Machinations Against US Shale and the Drive for Market Share
Among the most common explanations for the present glut of oil is the Saudi Arabian drive to maintain its market share in Asia in the midst of rising production worldwide, especially by the United States, a rising energy giant, with its shale oil. Analysts note that Saudi moves may be part of an attempt to price US shale out of the market, given that producing oil from shale using “fracking” is more expensive than traditional methods of extraction.
Telegraph columnist Andrew Critchlow told Rossiya Segodnya in a radio program on Friday that while Saudi Arabia can produce crude oil for as little as $2 a barrel, US production costs are some of the highest onshore costs in the world. The same can be said of Canada’s tar sands.
Estimates vary as to the price at which shale oil becomes unprofitable, ranging from $60-80. While the International Energy Agency estimates that only 4 percent of American shale costs over $80 to produce, Bernstein Research says that up to one third costs over that amount, Businessweek has noted.
Meanwhile other experts are less pessimistic. Charles Ebringer of the Brookings Institution told Rossiya Segodnya that while “the smaller boys get hurt in the $60 to $70 range in terms of drilling new wells…I don’t buy the argument that all of the existing unconventionals will all of a sudden shut down [due to lower prices].” Optimists often cite the ever-increasing efficiency and improved technologies used in shale oil extraction.
In the midst of the US moving ever closer to energy independence, and even providing for exceptions to its ban on the export of crude oil, Saudi Arabia has been offering discounts to the Asian markets, possibly as a preemptive move to maintain market share. Investment banking researcher Jeff Dietert noted earlier this month that signs point to a Saudi shift “from a strategy of holding prices at around $100 a barrel to a focus on market share,” International Business Times quoted him as saying.
A Saudi-US Conspiracy?
Meanwhile, New York Times columnist Thomas Friedman has speculated that either purposefully or through the coming together of a fortuitous set of circumstances, the Saudis and the United States may be waging a politically motivated “oil war” against Iran and Russia. Friedman brings up the precedent of the US-Saudi agreement from 1985, which reduced prices by three-and-a-half times in one year from $35 to $10 a barrel, shaving several points off the Soviet GDP and reducing its hard currency earnings.
Some Russian oil officials have had similar thoughts; Rosneft’s Vice President Mikhail Leontyev noted earlier this month that Saudi “discounts on oil” are based on “political manipulation,” pointing out that “Saudi Arabia is being manipulated, which could end badly.”
Other analysts note that a politically motivated conspiracy is highly unlikely; Ebringer said that while “the Iranians are blaming the Saudis [and] the Russians are saying it’s a Saudi-US plot against Russia,” these are just “great conspiracy theories, but I don’t think any of them really have much merit. I think we’re in a classic down market.”
Declining Global Demand
The decline in energy prices is partly attributable to declining growth projections for the Chinese economy. Experts also note that economic stagnation and the decline of industry in Europe, together with the increasing use of gas and coal for infrastructure needs, has led to a decline of demand for oil by up to five percent in the last year. Combined with a slight decline in US demand, the oil consumption of the industrialized countries is down by 200,000 barrels per day, according to the New York Times. This has led to an overall excess of about one million barrels in the world, with a present consumption rate of about 90 million barrels per day.
Ebringer notes that the decline in prices has only been compounded by the dumping of positions by Wall Street hedge fund managers, who had earlier placed hopes on oil continuing its rise over the long term due to global instability.
Rising Production and the Race to the Bottom
Expanded US oil production has been the main driver in the expansion of global supply; the country now produces 8.7 million barrels per day and has cut its imports from OPEC in half since 2008, according to the New York Times. Critchlow notes that the catch-22 of US production lies in the fact that the initial boom in drilling was stimulated by high prices, while the country’s dramatic increase in output has now decreased demand. “America just cannot continue to keep pumping and pumping…and yet expect the OPEC, on the other hand, to cut back its production to defend their price level,” Critchlow said.
Libyan and Iraqi production is also up, but remains unstable due to the threats of Islamist militants blockading Libyan ports and capturing Iraqi administrative and resource centers.
Saudi Arabia and Iran have also increased output, the latter due to the weakening of international sanctions on the country’s light crude exports. The OPEC countries are presently producing one million more barrels per day than their own quota allows for.
Despite Saudi Arabia’s low production costs and $735 billion in reserves, the country needs oil prices in the $80-85 range over the long term to balance its budget, which is 85 percent dependent on the black gold, Businessweek notes. Kuwaiti financial analyst Tariq Al-Rifai told Rossiya Segodyna in a radio program that while the Saudis really are among the best-placed to withstand lower prices, “over the long term I don’t think that is sustainable.”
November’s Quota-Setting OPEC Faces Likely Deadlock
Al-Rifai predicted that at the annual OPEC meeting in Vienna in late November, Saudi Arabia, Kuwait and the United Arab Emirates are unlikely to entertain the thought of reducing production quotas, while Venezuela and Iran will seek such a reduction. Iraq may also join the Venezuelans and Iranians, as it needs prices to remain in the $95 dollar range in order to maintain its national budget, and now more than ever, in light of the country’s conflict with the Islamic State.
Effects on Russia?
Despite the fact that 15-20 percent of Russia’s GDP is based on oil and gas revenues, which constitute 65-70 percent of the country’s exports, Russia has reacted to the decline in a generally measured way.
President Vladimir Putin noted at the recent Asia-Europe Meeting in Milan that present prices are not “any tragedy,” and that over the long term the probability of an adjustment and upward correction was high, Reuters said.
Earlier, Putin noted that despite the projected budget shortfall, which had been based on estimated prices of about $96, expenditures in the social sector would not be adjusted. Putin noted that the country will be able to “fulfill all social expenditures” promises, and that it has sufficient reserves “to do it without any substantial losses.”
Liberal economist and critic of the Russian leadership Sergei Guriev has estimated that in its present condition Russia can withstand $80-90 prices for several years. According to Guriev, this is due to the country’s accumulated reserves and the floating ruble’s ability to mitigate some of the shock; production costs are denominated in rubles, while revenues are in dollars.
At the beginning of October, the Russian Central Bank presented a series of scenarios, including a “stress scenario” and action plan for a decline to $60 a barrel, which Russian Minister of Economic Development Alexei Ulyukayev described as a doubtful scenario, given that such a price would be “uncomfortable for all of the large producers and exporters of oil.”
Speaking to Russian business news television channel RBK, Ministry of Finance spokesman Maksim Oreshkin noted that a stabilization of prices at around $90 a barrel would result in a 1.5 percent hit at Russia’s GDP, while decline to $80 would mean a 2 percent drop. Oreshkin noted that every dollar per barrel represents about $2 billion in lost revenues for the Russian budget.
Speaking at the Valdai International Discussion Club last Friday, President Putin did not specifically mention oil prices, but said that Russia “is a self-sufficient country,” and that it would work to “develop domestic production and technology and act more decisively to carry out transformation.”
There are high hopes among Russian experts and by many in Russian society that unstable energy prices, combined with Western sanctions, may drive a revival of the country as a major industrial, agricultural and technological power. Some industries have already seen growth in recent months as a result of the government’s push for import substitution, while the president noted the need for a “true industrial breakthrough” in the coming years, which would reduce the country’s natural resource dependency.
