Many oil producing nations including Saudi Arabia are currently going through difficulties as a result of the unstable price of oil on the international market. Though Saudi Arabia has been able to withstand the shocks at great cost not all oil producing nations big and small are comfortable with the situation., the situation has affected economies of all oil producing nations and their industrial set ups leading to huge cuts in production and employment in commercial and industrial firms around the world.
In October of 2014, Saudi Arabia signaled that it was willing to let oil prices fall and no longer cut production to support higher prices. Since that time Saudi Arabia has spent nearly $50 billion of its foreign reserves to keep its domestic social contract going in the face of diminishing oil revenues.
The oil kingdom has put its money where its mouth is in an effort to protect market share and get both OPEC and non-OPEC members to limit oil production. So what has Saudi Arabia’s $50 billion bought? Saudi Arabia’s policy together with a flood of oil supply and slow global economic growth drove down the price of Brent crude oil from $115 a barrel in June 2014 to as low as about $45 a barrel in January. But the price of oil came roaring back in April, staging its biggest monthly gain in six years, and is now trading above $66 a barrel.
Saudi Arabia’s oil policy has certainly inflicted pain on the economies of big oil producing countries like Russia and Iran. Russia, which is heading into recession and seen the ruble plunge, has reportedly conducted “unprecedented” consultations with OPEC, but so far no production cuts appear to be on the table. Iran is trying to find a way to export more oil by freeing itself from Western sanctions through a nuclear deal. The next OPEC meeting is set for June 5 and it seems unlikely that the oil cartel will change production targets.
© Provided by Forbes GARDEN CITY, TX – FEBRUARY 05: An oil well owned an operated by Apache Corporation in the Permian Basin are viewed on February 5, 2015 in Garden City, Texas. (Photo by Spencer)
Saudi Arabia has been able to squeeze U.S. shale producers. There are now about 700 rigs drilling for oil in the U.S., according to the latest Baker Hughes data, the smallest number of rigs drilling for U.S. oil since 2010 and more than 50% less than the number of rigs drilling in the U.S. last year. There have been thousands of workers laid off.
With oil prices lower, much of the U.S. oil industry has been unprofitable this year and many businesses have suffered losses. ExxonMobil recently disclosed that its U.S. oil and gas operations posted $52 million of losses in the first three months of 2015. Nevertheless, the oil behemoth’s diversified business cushioned the blow and ExxonMobil delivered first-quarter earnings that easily beat Wall Street expectations, even though they were down significantly from a year ago.
Still, so far there have been only three shale oil bankruptcies, with Quicksilver Resources being the only notable company to file for bankruptcy-court protection. Two other independent oil producers, Samson Resources and Sabine Oil & Gas, which just missed an interest payment on its debt, could potentially be next. There is a huge wall of money coming from the likes of hedge funds and private equity funds that continues to keep many of these businesses going.
The shares of many U.S.-focused energy producers have rebounded in recent weeks. Shares of Continental Resources, for example, are up 37% in 2015 and trade at the same level they were at in the middle of October, when West Texas Intermediate crude oil traded above $80. Whiting Petroleum’s stock is up by nearly 15% this year. Meanwhile, U.S. oil inventories remain high at about 490 million barrels, but recent data suggest that the growth of U.S. stockpiles is starting to taper off. OPEC’s expectation is that U.S. oil production is currently peaking and will start diminishing as 2015 progresses.
At the same time, Saudi Arabia has put the pressure on the Canadian tar sands. Canada is exporting a record amount of oil—3.1 million barrels a day—an amount that will continue to increase given the big fixed cost element and long-term nature of many oil sands projects. Suncor Energy, Canada’s biggest oil company and a leading oil sands player, just reported a loss of more than $340 million in the first quarter of 2015. Some oil sands projects are being delayed.
Saudi Arabia has some $708 billion of foreign oil reserves left to wage its oil war. The country’s new king, Salman bin Abdul-Aziz Al Saud, is dealing with a budget deficit of at least $40 billion this year— The Financial Times said it could reach $100 billion. Sub-$70 oil does not appear to be sustainable for Saudi Arabia, but for now it seems willing to keep spending its cash in an attempt to assert its will on global oil markets.
Sources: Nathan Vardi, Forbes Staff and
Alhaji Alhasan Abdulai
Executive director
EANFOWORLD FOR SUSTAINABLE DEVELOPMENT
244 370345/ 0264370345/0208844791 [email protected]/[email protected]
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