More on low oil prices with particular focus on Saudi Arabia

How fast do you suppose those drillers that scaled back could scale up? Out of focus photo by James Ulvog.
How fast do you suppose those drillers that scaled back could scale up? Out of focus photo by James Ulvog.

Had been planning to hold this article for a few days because of other posts I’d like to run first. Guess I’d better run it now. At the rate things are deteriorating in the Middle East, need to post it quickly before war headlines make it completely out of date.

12/30 – The Guardian – Recession, retrenchment, revolution? Impact of low crude prices on oil powers. Article walks through what low oil prices may be doing to each country.

A graph shows one factor that is fascinating to me, specifically the price needed to balance the national budget in various countries. Here are the prices a few countries need:

  • $208 – Libya
  • $120 – Venezuela – could be as high as $200
  • $115 – Ecuador
  • $96 – Saudi Arabia
  • $76 – Iraq
  • $70 – Iran

All of those countries plus more are feeling serious budget pressures right now with no end in sight.

Article acknowledges that Saudi Arabia knowingly kicked off a price war because of surging output in US shale.

Pressures on Saudi Arabia likely carry over to the extensive support they provide to various causes and countries outside their borders. They have provided massive support for Egypt. Curtailing that support could cause serious ripple effects inside Egypt.

Most significant new information to me is the article says IMF is concerned Saudi Arabia could go bankrupt within five years if they don’t make significant changes to the economic policies. That is another way of looking at their burn rate. Still, that is the first time I’ve seen speculation of bankruptcy in print.

1/1 – The Million Dollar Way – Retrenchment, Recession, Revolution? – This post pointed me to the article discussed above. Severe impact on Saudi Arabia is the highlight of the previous article and focus of this post.

Here are the challenges as seen by Mr. Oksol:

Saudi is in the fight of its life:

  • Yemen
  • ISIS has declared war on Saudi
  • huge domestic demand for energy
  • domestic subsidies being cut; the poor have been given no leniency
  • oil fields probably in trouble
  • US now allows direct competition with Saudi Arabia
  • Russia’s involvement in the Mideast adds another concern
  • burning through cash just when it needs more money for fighting a shooting war
  • desalinization plants huge consumers of energy

1/3 – Asia Times – Saudi Arabia stews in policy hell – Article has more background, substance, and nuance than I can absorb. Major point I draw is that Saudi Arabia has a large number of proxy fights with others. The Sunni/Shia tension puts the Saudis on the opposite side from customers (China), competitors (Russia, Iraq, Iran) and previously close allies (U.S.). Will try to get back to the article later and sketch out the relationships. Would help me to draw myself a picture.

1/3 – Financial Times – Oil’s prologue likely to be a harbinger of worse things to come – Headline is scaremongering. Text of article merely points out 2016 will continue to be a very difficult year.

Efficiencies gained from retiring less efficient drilling rigs, pulling back to the “sweet spots”, increasing amount of proppants, and generally more efficient drilling have likely been maxed out. One driller reported a 40% drop in cost of drilling a well in fourth quarter of 2014. In fourth quarter of 2015, the company only realized an additional 10% drop in costs.

Main point of the article suggests that 2016 will be more difficult than 2015 for a larger number of companies. I think I already knew that.

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