|Is it better to have gambled and lost?|
Saudi Arabia is calling the shots in the steep price decline of oil in recent weeks, by refusing to cut its output so as to remove production from the market and increase prices. Why is it doing this?
One possible reason is that it is underestimating the remorseless drive for profits that is the essence of the true capitalist system.
Right now, that drive is coming from smaller companies in the US fracking business:
Theories as to why OPEC didn’t reduce quotas at its meeting in Vienna on Nov. 27 are as cheap and abundant as crude in North Dakota. One holds that the Sunnis of Saudi Arabia want to hurt the Shiites of Iran, who need high-priced oil to finance their government.Another, expressed by Russian President Vladimir Putin, is that the whole thing is a conspiracy to undermine Russia, the world’s biggest oil producer. Yet another is that the Saudis hope to drive oil prices below where it makes sense for American shale producers to invest in new production. But shale producers have lowered their costs so much that in key fields they can make profits at $50 to $70 a barrel. That’s above core OPEC members’ exploration and production costs but below what many need to cover their government spending. “If my calculations are correct, this will go down as one of the worst commodity trading decisions ever,” Wilbur Ross, billionaire investor and chairman of WL Ross (IVZ), wrote in an e-mail.In fact, prices are being forced down not by any action (or inaction) of the Saudis but by the American shale producers, who are simply producing all the oil they can to maximize their profits. “Collectively, they’re not the most sophisticated folks, especially when it comes to world markets,” says Charles Ebinger, a senior fellow in the Energy Security Initiative at the Brookings Institution.With apologies to Ebinger, the shale producers don’t need to be sophisticates. Each operator is so small, it can increase production without pushing down the market price. That makes them price “takers,” not price setters. And because shale wells are short-lived, producers don’t have to plan far ahead, says Karr Ingham, a petroleum economist in Amarillo, Texas.Singly the shale busters are nothing. Collectively, their breakneck production is breaking OPEC’s neck. This is the remorseless, leaderless free market at work.
If Saudi Arabia fails to shut down large production volumes of oil from the fracking areas of the US, it will have caused tumult, but to no avail.
My bet is that this is exactly what is happening.