There’s nothing like adversity to test the strength of any team. This is true for teams on both the micro and macro level. It looks like the projected multi-year depression of oil prices is going to test OPEC’s organizational resolve as the oil cartel is once again reminded of their fundamental differences. On one end of the equation are countries like Saudi Arabia who have very low production costs. We’re talking less than $10 per barrel low. Now, that’s very low compared to other OPEC members like Nigeria and Venezuela who need to charge at least $50 to $60 per barrel to stay afloat. Now that oil’s moving close to the $40 per barrel price level, OPEC is finding itself at a crossroads.
It is no secret that Saudi Arabia’s primary priority is market share. It is willing to keep its massive network of oil wells pumping just to hang on to its market share. Other OPEC partners are primarily concerned with price and staying afloat given their higher oil extraction and production costs. The current crash in global oil prices have pitted OPEC partners against each other. Saudi Arabia is seemingly bent on making North American shale oil production collapse due to shale’s higher production costs. So far, it appears the gambit is working-the number of new shale oil well openings have crashed. Also, the Saudis’ strategy has produced an unintended, albeit welcome, consequences for North Sea oil producers. Given the high cost of extracting oil in the UK’s North Sea region, many smaller producers are facing bankruptcy. Regardless, it’s anyone’s guess how long OPEC can tow the Saudi party line given the financial pain being felt by some of its members.
Still, the Saudi strategy might backfire. Besides risking the resentment of its fellow OPEC members due to the Saudis’ use of massive Arabian production heft to steer OPEC’s production agenda, the Saudi kingdom registered a massive deficit recently. It can only operate in the red for so long. However, it has no choice but to continue to spend on massive government spending and social programs or risk Arab Spring-like popular discontent. Talk about being stuck between a rock and a hard place.
