Checkmate for Saudi Arabia

The debacle of oil prices has greatly exceeded that of the global financial crisis of 2008 and the Asian crisis of 1998. And it is much more severe. At the end of this summer of 2015, OPEC is just a shadow of its former self: simply put, it has been de facto dissolved and this cartel would be better off closing its offices in Vienna in order to save some cash… Similarly, it is easy to see that the Saudi tactic of flooding the market with petrol has backfired. Already in decline and very fragile due to the fact that the only income from exportation comes from the sale of just one product (oil), Saudi Arabia’s war using ancient weapons is dwindling.

The oil markets have indeed fundamentally changed since the time when investments became lucrative only after ten years. The Saudis were of course the undisputed masters when vast sums of money had to be handed over to make extractions from oil wells that would only come good many years later. This is why they got up to their dirty tricks in November 2014 when they decided to lower prices in order to stifle American oil shale producers, whom they had been banking on wiping off the map. As for the lost revenue due to the fall in oil prices, they would inevitably gain it back after the renewed rise in prices thanks to the disappearance of US producers. However, this venture, which consisted of making prices drop in order to harm competitors before putting them back up again in order to monopolise and maximise profits, is now an invalid practice. Also, this insane gamble taken by Saudi Arabia last winter to increase its own production to 10.6 million barrels per day at the climax of the fall in prices was already lost because it reveals a deep misconception of fracking, which is by no means a classical resource extraction method, and one which doesn’t require substantial investment nor elevated oil prices in order to be viable.

Far from being a traditional production model, fracking allows the operation of wells with as little as $1 million while ensuring immediate gains. What’s more is that extraction techniques are improving basically every day and allow the use of up to ten sites per day, while sophisticated computer programs detect cracks over a large area. To sum it up, the explosion in the development of fracking techniques – which will lead to the reduction of costs associated with extraction by nearly 45% in 2015 alone – is revolutionising the oil industry, previously the exclusive domain and prerogative of certain States, and which once demanded massive prior investment. Extremely responsive and flexible, the operators of shale oil would remain the beneficiaries even in the case of a rise in prices: this would in turn allow for the opening of many more extraction sites…acting on their part to squeeze prices due to increased supply.

Saudi Arabia is therefore no longer the go-to producer, since it is no longer capable of influencing oil prices. Having opened the floodgates in order to massacre the fracking industry, it is realising that its extraction rates are ridiculous and any attempt on its part to manipulate prices in order to let prices rise again will be seized upon by the frackers who will immediately open even more sites to profit from this goldmine. Basically, Saudi Arabia is going to have great trouble in about two years and will be confronted by an existential crisis in around five! The collapse of oil prices by nearly 55% in one year is effectively melting away this country’s cash reserves, a country which is suffering the torment and humiliation of budgetary deficits, and which has been reduced to issuing a public loan (of more than $5 million) in order to subsidise its needs.

For how much longer will Saudi Arabia be in a position to defend its Riyal as pegged to the Dollar at 3.75? Urgently needing oil to be at $106 per barrel in order to balance its budget, it is nowhere near seeing such prices again in the presence of a fracking industry as dynamic as it is innovative and which has managed to slightly alleviate its predatory behaviour. This is a warning of a wholesale sandstorm to come for the Wahhabi kingdom.