Tags: Middle East | Saudi Arabia | feeling pain | low oil prices | barrel | OPEC | US

It's Not Just US; Saudis Also Feeling Pain From Low Oil Prices

By    |   Wednesday, 06 May 2015 05:24 PM

Ever since the Organization of the Petroleum Exporting Countries — led by OPEC's 800-pound gorilla, Saudi Arabia — decided not to cut production levels last November, the global price of oil has taken a precipitous drop, with U.S. shale oil producers taking it on the chin.

Rig counts have been slashed in half and thousands of workers from energy-rich drilling areas such as the Bakken Formation in North Dakota have been laid off as producers try to survive in a low global oil price environment.

But while headlines focus on the economic troubles of North American producers, there are increasing signs that Saudi Arabia is feeling plenty of pain, too.

And while energy analysts remain divided over whether OPEC's November decision was a master stroke or a long-term blunder, there's little doubt the Saudis are going through one of the kingdom's most challenging times — and the low price of oil is making a rough patch even rougher.

Since October, the kingdom has burned through $47 billion of its estimated $750 billion in foreign currency reserves, and in the past two months has spent $36 billion, according to a report by the Financial Times, as low oil prices, combined with domestic spending and military operations, have buffeted the Saudi economy.

"They're in massive negative cash flow," said Chris Faulkner, CEO of Dallas-based Breitling Energy. "The only one worse is probably Algeria. These guys are obviously playing a dangerous exercise. You can say what you want, but they have a lot of debt."

Others think the Saudis made a strategically smart move.

"For Saudi, yes, I think" they made the right decision, said David Pursell, managing director and head of securities at the energy investment and banking firm Tudor Pickering Holt and Company, who is based in Houston. "It's logical and rational. Because out of the blue, you have all this growth in the U.S. and it's hard to compete at $100 oil. They can compete all day at lower prices."

Last June, the international price of oil reached $114 a barrel and crashed to $45 a barrel in January. The price has rallied a bit since, with Brent crude closing Tuesday at $68.40 a barrel.

It's true that it's relatively cheap to draw oil from the ground in places like Saudi Arabia, but at the same time the kingdom has one of the higher break-even prices for a barrel of oil in the world — estimated at $106:

That's because the Saudi government has expensive public spending obligations it needs to maintain.

"Right now they can't lower their budgets," Faulkner said in a telephone interview with Watchdog.org. "The reason they're so high is because of subsidies. And there's no way Saudi is going to tell the kingdom you're going to have to pay the real prices for power and real prices for gasoline. That's just not how they operate there."

Two-thirds of the country's population is under the age of 30, but the unemployment rate for those between 16 and 29 is 29 percent.

The build-up in foreign currency reserves figured to give the Saudis a financial cushion in a low oil-price environment, but geopolitics have also conspired to run up costs.

The Saudis spent millions and newly crowned King Salman promised bonuses to soldiers taking part in a military operation in the neighboring country of Yemen to try to quell an uprising by Houthi rebels, who have been encouraged — some say funded and directed — by Iran.

Saudi Arabia and Iran look at each other as rivals for influence in the Middle East, with the Saudi population made up of a majority of Sunni Muslims while Iran has a majority of Shiite Muslims.

"The [military] bonuses are not an encouraging sign," Steffen Hertog, associate professor at the London School of Economics, told the Financial Times. "It shows the knee-jerk reaction to political challenges is to distribute more money."

Though OPEC and Saudi oil ministers have denied it, the decision last November that sent global oil prices into a tumble was interpreted as a way to undercut U.S. shale oil producers.

Just before OPEC made its announcement, the "shale revolution" in North America — spurred by improved techniques in hydraulic fracturing and horizontal drilling — pushed U.S. output past Saudi Arabia as the world's No. 1 producer of liquid petroleum.

Since production costs are higher for North American companies than they are for Saudi Arabia and other Persian Gulf oil giants such as the United Arab Emirates, Kuwait, and Qatar, the OPEC strategy made sense.

While U.S. producers are feeling some pain, energy analysts have marveled at their resiliency and Faulkner thinks shale can eventually beat OPEC countries.

"I think they expected us to be already in a serious situation when they drove down the price of oil, but frankly, it hasn't happened," Faulkner said. "We're doing a lot more with a lot less. We're able to develop the assets at a much cheaper cost now. So I think what they've done is, they've put us through an exercise that has been very beneficial for us and that long term will hurt them."

But the Saudis are making their own moves.

To attract foreign investors, the kingdom next month will open a $575 billion bourse — a stock exchange — that will limit no single foreign investor from holding more than 5 percent of any listed company while keeping total foreign ownership of a firm to 20 percent.

Since an estimated 92 percent of the Saudis' economy is derived from oil production, the government is making a concerted effort to diversify its economy.

The government is plowing money into healthcare, transportation, mining, and information technology.,

In the meantime, both North American producers and the Saudis are doing what they can to survive in an economic environment that, it seems, neither camp can quite control.

"Does Saudi have the capacity? What if Venezuela falls apart? What about Nigeria? There are all sorts of things that can happen with low prices inside of OPEC," Pursell said.

"No one can set the price of oil — it's up to Allah," Saudi Oil Minister Ali Al-Naimi told CNBC on Tuesday.

Rob Nikolewski is the National Energy Correspondent for Watchdog.org. He is based in Santa Fe, N.M. Contact him at rnikolewski@watchdog.org and follow him on Twitter @NMWatchdog.

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Ever since OPEC — led by its 800-pound gorilla, Saudi Arabia — decided not to cut production levels last November, the global price of oil has taken a precipitous drop, with U.S. shale oil producers taking it on the chin. But there are signs that Saudi Arabia is feeling plenty...
Saudi Arabia, feeling pain, low oil prices, barrel, OPEC, US, foreign currency, reserves, Bakken, shale
Wednesday, 06 May 2015 05:24 PM
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