International Finance
Economy

Why Saudi will not be comfortable with high oil price

The reasons are the US shale industry, and the rise of Iran and Russia Suparna Goswami Bhattacharya April 18, 2016: Saudi Arabia finds itself in a strange position. That, it is not happy with low oil prices is understandable, but a price too high will also make the Kingdom uncomfortable. Strange as it may sound, experts opine that for Saudi Arabia, a price above $40...

The reasons are the US shale industry, and the rise of Iran and Russia

Suparna Goswami Bhattacharya

April 18, 2016: Saudi Arabia finds itself in a strange position. That, it is not happy with low oil prices is understandable, but a price too high will also make the Kingdom uncomfortable. Strange as it may sound, experts opine that for Saudi Arabia, a price above $40 will only increase competition as it would provide a life support to American frackers who have undermined the pricing power of the Kingdom these days.

The fact is the technology that has been developed by US frackers cannot be undone now, which effectively puts a ceiling on the price of oil. “Should the prices climb higher, more competition may enter the global energy market and drive down OPEC’s market share. If prices fall too low, then OPEC countries don’t get the revenue they need in order to support their economies,” says Robert Hill, economist at FocusEconomics.

In the past three years, the US rig count has fallen from close to 2,000 two years ago, to just over 1,000 a year ago and now to less than 500. This is all good news for OPEC as long as the price remains below $40.

John Hall, Chairman, Alfa Energy, states that though everybody expects shale frackers to be back in business once the price is above $40, “none of us actually know how quickly the industry will be able to re-mobilise itself and what output can be expected”.

Abhay Bhargava, Associate Director & Regional Head – Middle East, Energy & Environment Practice, Frost & Sullivan, says that the true threat to any oil producer, and not just the Kingdom of Saudi Arabia, is from the situation of excessive supply in the market that currently exists. “However, over a period of time, we would expect these spikes to settle down, and the market would witness a fundamental increase in demand, as newer refineries come up into operation, especially in the Middle East and Asia regions” says Bhargava.

It has been said that the industry would return to the market if the price of oil moved above $40. There may be renewed interest in the US, but more likely the threshold would have to be above $50 and closer to $60 for the shale industry to pose a real threat to OPEC and other producers like Russia.

Interestingly, there is another factor which probably concerns the Kingdom more than the US shale industry — the rise of Russia and Iran. An increase in oil price will help Russia and Iran raise funds for the insurgent movement that will threaten Saudi Arabia’s regime.

An expert, who requested anonymity, states, “I personally feel Saudis, at this point in time, are not much concerned about frackers. Keeping oil prices low will prevent Russia and Iran from funding these groups to the point they can win. It is a fight for power now,” the expert says adding that Saudi Arabia is secretly pumping oil in the market to keep the prices low.

There is another view though. US and Saudi joining hands to keep oil prices low to counter Russia and Iran is not practical. “The plan may backfire as Russian economy is far less dependent on oil than Saudi Arabia. Russian oil exports contribute 40% to their GDP. The figure is much higher for Saudi Arabia,” says Hall.

Meanwhile, oil prices have tumbled after a meeting of major exporters in Qatar collapsed without an agreement to freeze output. The failure was attributed to the cold war between Iran and Saudi Arabia.

Morgan Stanley, in its report, said, “The lack of even a non-committal agreement after one was in place in February underscores the poor state of OPEC relations… we now see a growing risk of higher OPEC supply.

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