Saudi Arabia has instigated two oil price wars in the last decade and has lost both. Given its apparent inability to learn from its mistakes it may well instigate another one but it will lose that as well. In the process, it has created a political and economic strait-jacket for itself in which the only outcome is its eventual effective bankruptcy. OilPrice.com outlines why this is so below.
The principal target for Saudi Arabia in both of its recent oil price wars has been the U.S. shale industry. In the first oil price war from 2014 to 2016, the Saudi’s objective was to halt the development of the U.S. shale sector by pushing oil prices so low through overproduction that so many of its companies went bankrupt that the sector no longer posed a threat to the then-Saudi dominance of the global oil markets. In the second oil price war which only just ended, the main Saudi objective was exactly the same, with the added target of stopping U.S. shale producers from scooping up the oil supply contracts that were being unfilled by Saudi Arabia as the Kingdom complied with the oil production cuts mandated by various OPEC and OPEC+ output cut agreements.
In the run-up to the first oil price war, the Saudis can be forgiven for thinking that they stood a chance of destroying the then-relatively nascent U.S. shale sector. It was widely assumed that the breakeven price across the U.S. shale sector was US$70 per barrel and that this figure was largely inflexible. Saudi Arabia also held record high foreign assets reserves of US$737 billion at the time of launching the first oil war. This allowed it room for manoeuvre in sustaining its economically crucial SAR-US$-currency peg and in covering any budget deficits that would be caused by the oil price fall. At a private meeting in October 2014 in New York between Saudi officials and other senior figures in the global oil industry, the Saudis were ‘extremely confident’ of securing a victory ‘within a matter of months’, a New York-based banker with close knowledge of the meeting told OilPrice.com. This, the Saudis thought, would not only permanently disable the U.S, shale industry but would also impose some supply discipline on other OPEC members. Related: Will U.S. Shale Ever Return To Its Boom Days?
As it transpired, of course, the Saudis had disastrously misjudged the ability of the U.S. shale sector to reshape itself into a much meaner, leaner, and lower-cost flexible industry. Many of the better operations in the core areas of the Permian and Bakken, in particular, were able to breakeven at price points above US$30 per barrel and to make decent profits at points above US$37 per barrel area, driven in large part through advances in technology and operational agility. After two years of attrition, the Saudis caved in, having moved from a budget surplus to a then-record high deficit in late 2015 of US$98 billion. It had also spent at least US$250 billion of its precious foreign exchange reserves over that period that were lost forever. In an unprecedented move for a serving senior Saudi…