Saudi Arabia's Aggressive Oil Production Plan Has Back Fired

Twenty months ago, Saudi Arabia decided to flood the world markets with oil in an attempt to compete with North America and its impressive shale production. Well less than two years later, shale production costs are so low that the Saudi Arabian economy is going to take a detrimental hit.  

“The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is a bitter victory at best,” writes The Telegraph. “North America’s hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits.” 

The US shale oil output continues to increase primarily in West Texas. Scott Sheffield, the outgoing chief of Pioneer Natural Resources, stated that the pre-tax production costs for the Permian Basin of West Texas has fallen to $2.25 a barrel. 

“Definitely we can compete with anything that Saudi Arabia has. We have the best rock,” said Sheffield. The cuts in costs is also attributed to advanced improvements in drilling technology and data analytics.  

Sheffield said the Permian has as much reserves as the Ghawar field in Saudi Arabia and if needed they could abstract 5m barrels a day even with a price spike of above $55. The current production is at 2m barrels a day.

The Organization of the Petroleum Exporting Countries (OPEC) is made up of the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, Venezuela and 9 other countries that produce roughly 40% of the world’s crude oil. So what does the impending ramp up in production by West Texas mean for the OPEC? 

“Opec may now have to brace for a longer war of attrition than they ever imagined. Global inventories of crude oil remain near all-time highs, record volumes are being stored on tankers off-shore,” writes The Telegraph.  

Although West Texas is ready to gear up production, other oil production areas are not experiencing the same growth. “Forest fires in Canada, rebel attacks in Nigeria, and other global upsets took 4m barrels a day off the global market at one stage over the May-June period, masking the continued world glut. These disruptions are subsiding. Lost output has dropped to nearer 2m barrels a day. That is a key reason why US crude prices have fallen 20pc to $41 over the last six weeks,” writes The Telegraph.

If West Texas does boost output by another 3m barrels a day at around $55 a barrel, Saudi Arabia is going to suffer.

Oil producers in other areas of the country could be benefiting from this type of energy production. But, fracking has been banned in New York due to “environmental damage” that hasn’t even been proven. The success of West Texas’ oil production is a compelling example why America should be pro-fracking.