The Saudis Vs. The Shale Producers

Ali al-Naimi, Saudi Arabia’s minister of petroleum, will be delivering the keynote address at a major energy conference in Houston, Texas today. Representatives from large and small oil companies will be gathering to hear the most influential energy policy-setter deliver his thoughts on the oil market.

Small shale producers, many of whom have not made a profit off a barrel of oil in nearly a year, are hoping that he will talk about how OPEC and other major producers are working together to bring balance to the market. Some are even hopeful that he will announce Saudi Arabia’s intention to support future production cuts. They are looking for any pronouncement that will cause prices—and speculation—to jump.

They may be sorely disappointed.

Shale producers feel a collective sense of pain that they hope Saudi Arabia is feeling as well. They see the fact that S&P recently downgraded the country’s credit rating and reduction in foreign currency reserves as signs of Saudi suffering. However, Saudi Arabia’s financial situation is nothing compared with what is happening in the shale oil fields.

Saudi Arabia can produce a barrel of oil at a cost of about $2. Even the best shale producers cannot produce a barrel of oil for less than $50 a barrel. With oil selling at about $30 a barrel, Saudi Arabia is still making more money off of its oil than any American shale oil producer. The media loves to report that Saudi Arabia is on the brink of disaster, citing its military activities in Lebanon and freeze in government payouts.

The fact is that Saudi Arabia does not feel their pain. In fact, some locals tell me the Saudi government may even welcome these minor inconveniences as a way to help nudge its own economy towards some diversification.

OPEC is not coming to bail out the shale oil producers. Meetings held last week in Qatar between Russia, Venezuela, and Saudi Arabia and in Tehran between Iran and Iraq yielded no substantial changes in policy. The Russian-Venezuelan-Saudi decision was to not raise production IF other OPEC and non-OPEC producers also agree to not raise production. This simply confirms al-Naimi’s policy that Saudi Arabia is open to discussing potential cooperation between OPEC and non-OPEC producers. It reflects no actual change in policy, because nothing was agreed to. In Tehran last week, Iran and Iraq committed not to make any commitments. This just tells us what we already knew—these two producers need the flexibility to increase production when opportunity arises and will take it. Therefore, OPEC will also keep its options open.