A U.S.-Saudi Move to Lower Oil Prices?

This article was written by Oilprice.com -- the leading provider of energy news in the world. Also check out these recent articles:

Could the U.S. unleash a flood of oil from the strategic petroleum reserve that would drive down prices in order to punish Russia? While the idea has been kicked around over the last few weeks – most recently by George Soros – it has also been dismissed as not a serious option. Some say the impact of an oil sale, if it actually succeeded in lower prices, would be temporary. Saudi Arabia could cut back on production to keep oil prices at their current levels. Others decried the idea as contrary to the objective of the SPR, which has been setup to be used only in cases of emergency.

However, over at Quartz, Steve LeVine wrote an interesting article about the possibility of a coordinated response between the U.S. and Saudi Arabia that could have a much broader impact on oil markets. President Obama is, after all, meeting with the Saudi King on March 28. Ukraine is certainly going to come up in their discussions – his time in Europe was dominated by coordinating a response to Russia, despite the original intention of the trip to discuss nuclear security.

LeVine argues that it is possible that the U.S. could sustain a sale of 500,000 to 750,000 barrels of oil per day from the SPR. If the U.S. coordinated with the Saudis to ensure that they did not cut back production – indeed, they could even step up production from 9.7 million bpd – the greater supplies could slash prices almost immediately. Russia gets about 70% of its export revenue from oil and gas, so even a modest drop would be a significant blow. A former Ford and Carter administration official believes a U.S. SPR release could lower oil prices by $12 per barrel, potentially costing Russia $40 billion in lost revenue.

But by LeVine's own account, there are few signs that such a move is in the works. Saudi officials, including Prince Turki bin al-Faisal, recently remarked about the global nature of today's oil market, and the inefficacy of a single nation's move to impact supply. Moreover, Saudi incentives aren't exact in line with such a move. As one the world's largest oil producers, Saudi Arabia would suffer from a drop in oil prices. And the fiscal breakeven price for Saudi Arabia is rather high, considering its budget necessities. Bank of America Merrill Lynch estimates the Saudis need a global oil price of $85 per barrel for its budget to breakeven. That figure has crept higher in recent years, meaning the Saudis are probably not inclined to want oil prices to decline from the $105-$110 range, where they have been for the last few months.

Not only that, but as LeVine notes, the Saudi King is convinced the U.S. is "unreliable," and relations between the two countries hit a low point after Obama's back and forth over air strikes on Syria last year. With Saudis increasingly frustrated with the U.S., why would they shoot themselves in the foot just to help out an unreliable partner? Now they could be interested in striking a blow against Iran, which lower oil prices would do. But, that doesn't seem like enough of an upside.

Back in the U.S., President Obama could get an earful from oil producers if he reaches for the SPR spigot. Attempting to saturate the market with SPR oil could lower prices, but that would be pretty damaging to U.S. drillers. Their Republican allies will also oppose the move, at least they did when Obama used the SPR back in 2011 during the Libyan civil war. Republicans may have more difficulty justifying their opposition this time around, given that they have been the loudest about using American energy as a geopolitical weapon. But they will surely argue that exports are the better answer to Russia than an SPR release.

For now, Obama will probably hold the SPR card in his back pocket. Should Russia resist any further action in Ukraine, nothing will come of it. But, he is almost certainly mulling over the idea in the event that Russia takes broader action in Eastern Europe.

Bad news for OPEC could be good news for investors
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 


Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 30, 2014, at 5:40 PM, ilsm50 wrote:

    To lower crude prices Persian Gulf has to put more into the tankers and US has to close expensive wells.

    The last time oil "price elasticity" changed the bottom dropped out on price which shuttered a lot of the high cost production.

    Persian Gulf has a lot of margin, the rest of the producers (including Obama's) haven't much career in lower prices!

  • Report this Comment On March 30, 2014, at 9:52 PM, sliderw wrote:

    Go green, dude!

  • Report this Comment On March 30, 2014, at 11:46 PM, srik wrote:

    If USA wants to counter Russia, it should open up its Alaska field and sell it for lower prices.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2894672, ~/Articles/ArticleHandler.aspx, 11/28/2014 7:41:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement