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Saudi Arabia’s oil price war: relying on low cost of crude oil production

Saudi Arabia is at war on different fronts. The kingdom is fighting the shale oil and gas producers in North America so as to maintain market share. Saudis are also fighting Iran in order to maintain the dominance of Sunni Islam.

Fair Enough! Saudi Arabia; the world’s main oil producer second to the USA; has the least crude oil production cost second to Kuwait; can comfortably take on the world.

Saudi Arabia has a daily crude oil production of 11.624 million barrels at the cost of $9.80 per barrel. Thus, the kingdom will be at profit even if the price of crude oil falls to $15 per barrel.

But the US shale oil producers require the international oil market price not to fall below $70 for them to remain in business. And so, the Saudis strategy is to oversupply the market to force down the price of crude oil and thereby send the shale frackers back to the rocks.

The Saudis strategy is working as most of the North America’s shale oil and gas companies have filled for bankruptcy protection. They don’t even have the money to meet the cost of production before talking of making profit.

The authorities in Saudi Arabia believes, obviously, if the shale oil producers are not driven out of market; they will lose their Europeans and American customers to them. To the Saudis, it is better to sell more barrels of oil at a lower price than to sell fewer barrels at a higher price. Why not; they have the volume at lower cost.

This is simple economics – selling volumes will maintain employment within the oil industry although wages may decline. But it is better than shutting down some oil installations if demand falls, which will lead to unemployment. As at the current oil price of about $33, the Saudis are winning the oil price war against the shale oil producers.

On the other hand, the Saudis premised price of $15 per barrel is to curtail Iran’s exploit in Syria. And by extension, weaken the rise of Iran’s Shi’ah Islam in the Middle East and around the world.

Meanwhile, while emerging from international economic sanction, Iran set the price of its crude oil at $25 per barrel irrespective of the market price. That price can sustain them in the meantime considering their cost of production is $12.60 per barrel.

As it is said, it is the grass that suffers when two elephants fight. Other OPEC countries with high cost of production will suffer this oil price war. For example, Nigeria’s cost of producing one barrel of oil is $31.60

As such, it will be unimaginable what will be of Nigeria if the Saudis succeed in pulling oil price down to $15 per barrel. Even at the current price of $33, Nigeria is barely making a profit of $2 per barrel. No wonder President Buhari of Nigeria is currently in Saudi Arabia visiting King Salman and perhaps begging him to soften his position for the sake of Nigeria.

I guess in his plea, Buhari will remind King Salman how he massacred his fellow Nigerians (Shi’ah movement in Nigeria) in solidarity with the kingdom’s war against Iran. Anyway, permanent interest is what matters in politics, sentiment can wait for the sun.

As Buhari is used to speaking to Nigerians with his ‘body language’ he probably had read the body language of King Salman that his pleas may have fallen on deaf ears. And so, Buhari proceeded to Medina for lesser hajj so as to pray for Nigeria. Well, someone should tell the President that ‘heaven helps those who help themselves’.

It is worthy to note that even though the praying ground (Medina) is in Saudi Arabia, the Saudis still rely on strategies than prayers – counting on their low cost of crude oil production.