With crude oil prices on the decline, Saudi Arabia's strategy on production is being called into question. Why isn't production being cut, and how are U.S. projects being impacted? On today's The Cutting Edge, EnergyWire deputy editor Joel Kirkland discusses the international implications of the downward trend on oil prices.
Monica Trauzzi: Welcome to The Cutting Edge. With crude oil prices on the decline, Saudi Arabia's production strategy is being called into question. EnergyWire deputy editor Joel Kirkland joins me to dissect the strategy and its international implications.
Joel, the normal course of action in a situation like this is to cut production. We're not quite seeing that this time around. What are the possible reasons, and is Saudi Arabia trying to retain market share, as they claim, or are they trying to send a message?
Joel Kirkland: Monica, the reason for declining oil prices is multiple. It's really confluence of events that have taken place over the past several months. Since about June the Organization of the Petroleum Exporting Countries, or OPEC, has purposely cut its prices. Saudi Arabia has been sort of the leader in that and so has Kuwait. Since recently they also kind of declined to discuss the options of cutting production, so you have both cutting prices and increasing production over time here.
The second thing that's going on, of course, is the U.S. oil production, which is coming out of North Dakota and Texas and Colorado. That is having a big effect. You know we since about 2011 the U.S. has produced about 3 million barrels a day more than it had been, which in a 90 million-barrel global market that's just enough to make a big difference.
Thirdly, economies in both Asia and Europe are softening a bit and so you've really got competition for market share in Asia, and Saudi Arabia is taking that pretty seriously. And so Saudi Arabia, I would say, is trying hard to kind of maintain its market share as all of these forces around it are chipping away.
Monica Trauzzi: So the majority of the Saudi budget relies on oil revenues, do they continue to meet their budget with the price per barrel being as low as it is?
Joel Kirkland: That's a good question. I mean it's a bit of mystery, although we know that Saudi Arabia has about $800 billion in cash reserve. So of course, they can allow those cash reserves to dwindle a little bit if they want to. You know, the other thing is there is some discussion about whether Saudi Arabia needs $100 oil to be able to kind of continue meeting its domestic needs or whether that can drop down to $90 or $80 and they can be OK. I think the number that most people talk about is about $95 a barrel for Saudi Arabia to meet its budget.
Monica Trauzzi: Could we start to see strange bedfellows emerge to sort of put pressure on OPEC to cut production?
Joel Kirkland: Yeah, for sure. I mean for one thing you have both the United States and Russia, who have an interest in high oil prices over time. Also you have Venezuela, which is more or less, you know, falling apart because of the declining oil price. And they've got huge budget problems, they've got domestic political turmoil. You know Nigeria's in sort of the same boat. So you have a great deal of interest in maintaining a $100-plus oil price but really you have OPEC, which is the main organization that controls prices at the end of the day, putting itself in a position of wanting to compete more strongly globally.
Monica Trauzzi: What's the impact of all this on some of those U.S. oil project that you referenced earlier, and how should U.S. oil markets be adjusting to what's happening globally?
Joel Kirkland: There's a lot of discussion around that. Shale oil is, you know it produces well at about $85 a barrel, $100 a barrel is even better. But a lot of people say it could, some people say it could drop down certainly below $80 a barrel even go to $60 a barrel and be OK. It depends on where you're at in the shale patch. So if you're in kind of the central part, the core part of the Bakken Shale up in North Dakota, you can probably continue producing. But if you're sort of a high-cost producer in a less central part of the shale then you may have trouble. So there could be some shaking out over time for U.S. companies.
Monica Trauzzi: How do falling crude oil prices impact the debate we see here in Washington on crude oil exports?
Joel Kirkland: Well, I think it's going to continue to inflame it a bit. You know I think U.S. exports, you know U.S. oil producers have been pushing pretty hard to get the U.S. Congress and the administration to lift a ban. I think they'll continue to push hard. I think this drives them harder to do it because if you're able to sell into the international market I think they can make more money. There's been a differentiation between the price in the U.S. versus the price globally, and so it would benefit them to be able to sell internationally.
Monica Trauzzi: All right. We'll end it there. We'll continue to watch this story, and I know EnergyWire will continue its coverage on it. Thank you.
Joel Kirkland: Thank you.
Monica Trauzzi: More Cutting Edge coming next Friday, we'll see you then.
[End of Audio]