Has Saudi Arabia underestimated the resilience of US shale oil?
When OPEC took the decision to maintain production in November 2014, in the face of falling global oil demand, it was largely at the behest of Saudi Arabia, who were driven by the desire to regain lost market share. This strategy was a gamble that US shale oil producers could not sustain production levels at much lower prices. This strategy to decimate the US shale industry has, so far, disastrously back-fired.
â€œIt is becoming apparent that non-Opec producers are not as responsive to low oil process as had been thought.â€ (Saudi Arabia Central Bank)
Whilst US shale oil rig numbers have shown a decline since late last year, production rose to a 43year high of 9.6 million bpd in June 2015, not far short of Saudi Arabiaâ€™s figure of 10.6 million bpd.
â€œThe freight train of North American tight oil has just kept on coming.â€ (Rex Tillerson, Chairman, President and CEO ExxonMobil Corporation)
So is Saudi Arabiaâ€™s gamble doomed to failure? It relies on oil for 90% of its budget revenues, there is no taxation on income, and heavily-subsidised petrol costs the equivalent of 12 US cents a litre.
The International Monetary Fund has estimated that Saudi Arabiaâ€™s budget deficit will reach 20% of Gross Domestic Product (GDP) in 2015, and that the country needs oil to trade at $106 per barrel to break-even on a fiscal basis.
In a 2,000-word essay, discuss whether Saudi Arabiaâ€™s [and thus OPECâ€™s] decision in November 2014 was founded on logical reasoning, or was a strategic error of enormous proportions. You should discuss the prospects for the country if oil remains around $60 a barrel, and the effect on Saudi Arabiaâ€™s foreign reserves, and their social spending. Also, reflect on whether conventional oil production cuts would be likely to cause a return to $100 a barrel oil prices.
Your own interpretations and conclusions from your researches are fundamental. Supporting your own arguments in a robust and objective manner will qualify for better marks than a simple restatement of the data and opinion found in the research.