Saudi Arabia has been the world's second biggest oil producer and the top crude exporter. In normal circumstances, a country with such good "reserves" would step down to help out others during crucial times but unfortunately, Saudi Arabia is not ready to make space for others. Khalid Al Falih, chairman of Saudi Aramco claims that they will not leave the position they have worked so hard to maintain and refuse to stop production. He even stated that Saudi Arabia is not responsible to step up whenever there are huge economic imbalances, but at the same time will be willing to cooperate for short term adjustments.
The reason why they are not stopping their oil production is for two reasons:
- They want to maintain their position in the oil market.
- Increasing competition from the US shale industry and Iran since their sanctions have been lifted.
Although they are confident that they will be able to withstand the effects of this price drop for a long time, even though they think it will not last for long.
http://money.cnn.com/2016/01/21/investing/davos-energy-saudi-oil/index.html?iid=surge-stack-dom
Throughout 2015 a bold trend continued to emerge, that being one of an increase in oil production by the United States. Forbes reported last May that since 2008, oil production has increased by 80%. Colorado, Alaska and Texas among several others grew as oil hotspots. That Saudi Arabia believes they can continue to compete with the US and still make a profit seems near absurd, as supply continues to rise. However, what in some ways is also absurd is the fact that the true victim here is beginning to be Venezuela. Demand has continued to drop so continually for so long, President Nicolas Maduro proposed declaring a state of economic emergency. Yet these few countries continue to push OPEC close to a recession.
ReplyDeleteIt is interesting to think of the price of a barrel of oil today versus just two to three years ago. With such a great supply of oil all over the world (manufacturers in the Middle East and also various other countries and states in the US), one would think that the oil producing nations would eventually back out since the price has dropped so significantly. However, it seems like some countries (Ex: Saudi Arabia) are using this fact to their advantage since it is not profitable to continue the production of oil in some states of the US now. As in economics, there are always costs and benefits. It appears like the average american consumer is benefiting from such low prices since they can spend more of their disposable income on other consumer goods or put more in savings; while on the other hand, some American manufacturers are beginning to feel the negative affects.
ReplyDeleteIt will be interesting to see how Iran affects the Saudi oil market. The article seems to think that Iran will try to re enter as a top power in the oil market, and this will create more competition in the Middle East, a place which has already seen a large growth in oil competition. The reemerging Iranian oil market and low oil prices will surely test Saudi Arabia and their control of market share. It will also be interesting to see how this affects domestic oil production.
ReplyDelete^I would agree, Iran re-entering the oil market could have a potentially adverse impact on Saudi Arabia's position, specially considering that Iran's potential output could increase the world supply of oil by 3-4 million barrels a day, and given the already historically low oil prices, it doesn't seem like Iran's involvement would make things better for either Saudi or other oil-exporting countries.
ReplyDeleteThis is definitely an issue that has affected a lot of areas throughout the world. Here domestically in the US, the low oil prices is causing revenue for oil businesses to go down, which will be interesting to see how this problem will continue based on the fact that the article stated that Saudi Arabia can withstand these low prices for a long time before it seriously affects them, which might not be the case for others in the market competing. This could be a great overall outcome, long term, for Saudi Arabia because with other competition suffering from low prices, that competition could potentially drop from the market, which because Saudi Arabia can withstand these low prices for a long time, could have them reclaim some of the market they previously lost from competition.
ReplyDelete