Saudi Arabia: We won't cut production even if oil is $20

The Saudis have thrown down the gauntlet to more expensive producers.

by Rachel Savage
Last Updated: 23 Jan 2015

Anyone betting on oil prices recovering in 2015 might want to look away now. The price of a barrel of Brent Crude (the main global oil benchmark) fell back below $60 (£39) yesterday after Saudi Arabia’s oil minister said the kingdom wouldn’t be cutting production – even if black gold plunges to $20.

‘As a policy for Opec, and I convinced Opec of this… it is not in the interest of Opec producers to cut their production, whatever the price is,’ Ali al-Naimi said in an unusually forthright interview with the Middle East Economic Survey. ‘Whether it goes down to $20, $40, $50, $60, it is irrelevant.’

Brent Crude is now selling for around $60.45, having fallen by more than 45% this year since its peak in June.

The Saudis have clearly decided, then, that it’s no use limiting production in an attempt to force up prices in a world where the dominance of Opec, the 12 country oil cartel, has been challenged recently by the shale gas revolution in the US. Market share, they reckon, is more precious than profits right now.

The Saudis can afford to make this gamble as their production costs are a measly $4-$5 per barrel. On the other hand, shale gas projects, as well as deep-water wells off Brazil and West Africa, may now no longer be economically viable.

As Naimi put it bluntly, ‘We want to tell the world that high efficiency producing countries are the ones that deserve market share. If the price falls, it falls... Others will be harmed greatly before we feel any pain.’

Others like fellow Opec member state Venezuela, which depends on oil for 96% of its foreign exchange and where inflation is spiralling upwards towards triple digit figures. Or Russia, where the budget is half oil and gas money and which has had to take desperate measures in the last week to stop the rouble becoming worthless.

But there is of course a silver lining for non-oil producers, consumers and companies that buy the black stuff (chemicals producers, airlines, etc). Indeed, the IMF said yesterday that a prolonged price slump could boost global GDP 0.7% next year and 0.8% in 2016. ‘We see this as a shot in the arm for the global economy,’ its chief economist Olivier Blanchard said.

Gas-guzzling China, the IMF said, would be the biggest beneficiary, with a potential GDP boost of 0.7% in 2015 and 0.9% in 2016. Interestingly, researchers at Fathom Consulting think ‘the slowdown in Chinese demand is the dominant factor’ in falling oil prices, rather than the supply gut from American shale. Swings and roundabouts.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today