Following the refusal of Russia to oblige with OPECs interest in saving the oil market, Saudi Arabia decided to end its partnership with it. Hence decided to declare a price war on oil and maximizing their production levels. This marked a big crash in oil prices since 1991.
Nonetheless, more importantly, Saudi’s new policy changed global oil prices. Giving it a long-term advantage of gaining control of the global oil market. As the world’s largest oil exporter, Saudi Arabia tried to control its production levels to meet the requirements of global oil markets. Consequently, the country had to put up with the uncooperating nature if Russia.
The country’s head, Crown Prince Mohammed bin Salman is dedicated to increasing the kingdoms share in the oil industry since its rich in oil reserves. This will mark the end of OPEC. The long-term policy will enable Saudi to gain control of the oil market. Since it no longer follows OPEC’s regulations.
The decision, however, seems to impact negatively on the majority of the oil-exporting countries, international energy companies, and American shale producers. Due to the competition in oil prices, especially reduced, most buyers will brace up for the cheap oil sold by Saudi. This decline in prices will reduce the revenues or even result in bankruptcy.
Reasons why the Kingdom ended its alliance with OPEC
Spare production of oil
Successors to the Kingdom have realized that the production of extra oil aids in the management of the global market. Especially in times of oil shortage. Spare oil enables an effective response to the world’s oil market during crises.
Saudi Aramco investment in oil production
The state’s oil and gas company, Saudi Aramco has invested over $35B since 2012 to maintain production of 12 million barrels of oil per day. And a spare of 1.5 to 2 million barrels per day. By the 1st of April 2020, Saudi Arabia expects to be producing exports worth 9.5 to 10 million barrels per day.
By so doing, it will surpass Russia and become the second-largest oil producer in the world. The oil price war is unlikely to end soon. Maybe after two years when Saudi Arabia takes back the global oil production crown from the US.
Saudi Aramco can sustain a very low oil price for a long time
Due to the political and financial will on upstream production of oil, Saudi will offer oil at low prices. The lower prices will be manageable until the next decade. According to Aramco CEO Amin Nasser,
“In a nutshell, Saudi Aramco can sustain the very low price for a long time.”
Saudi oil is less costly when it comes to production. Since it costs $8.98 per barrel. This is in comparison with US shale oil and Russian production which costs $23.35 and $19.21 respectively. While US non-shale costs $20.99. With new drilling technologies, Saudi production costs have even reduced i.e. in Shaybah.
The new policy suggests Saudi regaining power over world oil production
The new policy promotes low oil prices which will help them gain control of the oil market. The use of hydraulic mining for shale oil enables the production of several million barrels daily. With the reduced prices, US producers for shale oil will face a challenge in the future. Especially since shale oil is expensive to extract.
The country is the world’s largest oil exporter by a margin
Saudi Arabia is rich in many oil reserves which amount to 25% of global oil. It Produces 70% of global spare oil. The country can comfortably meet their stakeholders’ expectations, selling a barrel less than $30.This new policy is under the latest government. Oil producers who refuse to accept the shift are likely to suffer.
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