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Perhaps Saudi Arabia can't stop the US from becoming the next energy superpower with the oil fracking boom:
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What US should do to fight this 'oil war': Insana
CNBC – 22 hours ago
Saudi Arabia, and its fellow members of OPEC, may have just launched an oil war. At the conclusion of its December conference, held in Vienna on Thanksgiving Day, OPEC, led by Saudi Arabia, decided not to cut oil production to halt the better than 30-percent drop in the price of crude oil this year.
For American consumers of energy products, that may very well be the best news of 2014. But the Saudis don't appear to be letting oil prices drop out of the goodness of their hearts. Increasingly, energy experts are saying that the Saudis are using a menacing little maneuver to manipulate the price of crude back up by punishing companies - and countries - mainly the U.S. and its energy industry, by driving prices so low that the recent increases in domestic oil production will be scaled back dramatically as fracking becomes a money-losing endeavor for both marginal and major oil producers in the U.S. Read More Harold Hamm loses $10 billion from oil shock Unlike Russia, or other OPEC members, Saudi Arabia is said to have enough spare change that it can fund its government for several years to come, and, thus, can suffer plunging prices better than other producers.
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OPEC is wrong to think it can outlast U.S. on oil prices
Technology is cheaper and West doesn't use oil to fund a welfare state
By TIM MULLANEY
Published: Dec 2, 2014
Give Saudi Arabia credit: Whoever sets oil-production policy for the desert kingdom has guts. Unfortunately, the sheiks have made what’s likely to become a sucker's bet.
You know this part already, but the 12-nation Organization of the Petroleum Exporting Countries last week declined to cut production, sending Brent crude oil futures tumbling to their cheapest point since 2009. The Saudis appear to be spoiling for a fight, trying to find out exactly how cheap oil must be to force surging U.S. shale-oil production to seize up like an unlubricated engine.
"Naimi declares price war on U.S. shale oil,"
- Reuters headline, referring to Saudi Arabia Oil Minister Ali al-Naimi.
But there are at least three big problems with this strategy.
- 1) North American crude isn't as expensive to produce as it used to be.
- 2) There's more than you think in the pipeline to make it even cheaper.
- 3) OPEC nations, including Saudi Arabia, have squandered their edge in cheap oil supplies on welfare states rulers can't easily cut back.
In 2012, when U.S. shale burst into public consciousness, common wisdom was that it would cost at least $70 to $75 a barrel to produce. As recently as last week, saying U.S. producers could tolerate $60 oil seemed aggressive.
But data from the state of North Dakota says the average cost per barrel in America's top oil-producing state is only $42 - to make a 10% return for rig owners.
In McKenzie County, which boasts 72 of the state's 188 oil rigs, the average production cost is just $30, the state says. Another 27 rigs are around $29.
That's part of why oil companies aren't cutting capital spending much - and they say they can keep production rising without spending more, by getting more out of wells they have already drilled.
Yes, it costs Saudi Arabia only about $2 a barrel to get crude out of the ground. But analysts insist the Saudis' real pain point is more than $100 a barrel - more than $30 higher than its price now - because of what they do with the money once they have it.
In 2010, the Saudis spent $130 billion to combat the Arab Spring, the Persian Gulf Fund reports. Some of that money went for better education and health care, and a little for infrastructure. Then there was a 15% raise for government employees, higher unemployment benefits, a government-subsidized minimum wage hike and 500,000 new homes in a nation of 28 million people. It cost 30% of Saudi gross domestic product.
Naimi's strategy to squeeze North Dakota and Texas is a bet that in the long run, low prices will force a cut in production and a return to Saudi leverage. But it will be much easier to further trim North American production costs than to convince whole nations to eat less.
OPEC still looks like a late-1990s company caught in Harvard Business School professor Clay Christensen's "Innovator's Dilemma" - so married to once-innovative business models, it couldn't adjust when technology re-engineered their industries.
"Think of the Saudi welfare state as oil's brick-and-mortar stores: integral to an old business model, unsustainable in the new."
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