Oil prices have been one of the biggest news stories of 2014. The price of oil is down more than 25% off its recent high, which has been falling like a rock after Saudi Arabia said it won't cut production as its fine with lower oil prices.
This is leading to a lot of speculation as to what's driving OPEC's decision to stand firm on production. It stands to lose billions of dollars in revenue, which is causing many of its members to face hard times. Some of the speculation was that there was some hidden conspiracy to get gas prices lower for the U.S. election. Others suggest that there's a hidden agenda to put pressure on Russia or Iran. It seems like everyone has an opinion, but if you ask U.S. oil industry executives, there's one real agenda.
What's on the agenda?
Scott Sheffield, the CEO of Pioneer Natural Resources (NYSE:PXD), is quite sure he knows what OPEC is really trying to do. On the company's conference call to discuss its third-quarter results, one of the investment analysts on that call asked him for his thoughts on the perceived price war with OPEC. The analyst asked,
In terms of the market share battle with Saudi Arabia, is this just a street fight or just an outright market share issue? Or are there other things going on? Are there hidden agendas that you can maybe speak to in terms of maybe driving down price in the U.S. so that they can purchase U.S. assets or just getting the other OPEC guys in line to -- so they all cooperate in terms of controlling the market better? What's the real agenda here?
Sheffield answered by saying,
No. I think, that's the real agenda. There's been articles written about whether or not they're trying to hurt the Russians or the Iranians, but you have to realize, OPEC is down to just Saudi Arabia, maybe Kuwait and maybe UAE. But when you're trying to negotiate with the bankrupt Venezuelans or trying to negotiate with the Shia in Iraq and Iran, that's going to be -- it's going to be a lot tougher for OPEC to come to an agreement to cut production.
What Sheffield is alluding to is that the OPEC of yesterday is not the OPEC of today. Saudi Arabia, which produces a third of OPEC's oil, really holds the keys here because it not only is the biggest producer, but it's one of the few stable governments that can actually control its own oil output. He points out that it would be awfully hard for Venezuela to cut production because of its financial issues, while Iraq and Iran face some governance issues.
Everyone loves a good fight..except OPEC
Sheffield went on to say that Saudi Arabia sees a real challenger to its control of the oil market by noting that,
So the U.S. is still growing over 1 million barrels a day. Most people have the world growing only 600,000 barrels a day this year because of Europe's economy and what China is doing. And so the stimulus, I think, will help long-term, $1 trillion stimulus. And so prices should recover within the next two years.
What he's noting here is that currently oil supplies, thanks to the U.S. shale boom, are outstripping demand due to weakness in Europe and China. However, falling oil prices will provide a massive economic stimulus that will drive demand higher. It will take a couple of years for the stimulus of lower oil prices to fuel the global economy, but when it does, oil prices should pick up.
The Saudis see this, too, and realize cutting production will be tough to do because of the current makeup of OPEC. Sheffield noted that,
But it's going to be really hard for OPEC, I think, to come to some type of agreement just because of the status of these various OPEC countries. I didn't add Libya. Who do you negotiate with in Libya to cut production? You got three factions, one of them is Al Qaeda-related. So who do you negotiate there to cut production? So it's a lot tougher than it has been in the past. So it's down to Saudi to cut production, they just don't want to do it. So it's putting pressure on the U.S. shale oil revolution.
And there you have the real agenda, if OPEC can't control its members then it needs to control its competition. So, by holding firm, it can put pressure on the U.S. shale oil revolution and slow its growth. Knowing that U.S shale producers like Pioneer Natural Resources want to see the American oil export ban lifted, the Saudis want to make exporting oil less lucrative by allowing the price of oil to fall. It's a move that OPEC hopes will cause some damage to the shale oil revolution so that it can maintain its control of the oil market.