Saudi Arabia: Saudi Arabia-OPEC maintain oil production and prices fall to five-year low
November 28, 2014
Saudi Arabia decided to maintain its current level of oil production despite the recent fall in oil prices. The decision has raised concerns in the international community and prompted global oil prices to fall further at the end of November, reaching a five-year low. During the 27 November OPEC meeting, Saudi Oil Minister Ali bin Ibrahim al-Naimi acknowledged that Saudi officials prefer a higher oil price, but that the Kingdom, together with the rest of OPEC members, had refused to cut oil production.
Although the motivation for Saudi Arabia’s strategy is still unclear, some analysts agree that the state-owned oil firm Saudi Aramco is targeting the booming oil shale sector in North America. Saudi Aramco’s production costs are as low as USD 5 per barrel and, by keeping oil prices low, the firm is expected to not just reduce the drilling of new oil shale discoveries in North America, but also to hamper future investments, which is a tactic aided by the fact that many of the mid-sized U.S. oil players are highly-indebted.
Whether the Saudis’ strategy will be successful remains to be seen. However, a recent study elaborated by the International Energy Agency (IEA) points out that half of the current U.S. oil shale production requires a cost-recovery oil price of at least USD 75 per barrel for the Brent Blend. Amid uncertainty regarding evolution of future oil prices, price volatility is likely to be the norm following more than two years of relative stability.
Author: Ricardo Aceves, Senior Economist