This contrarian argument, on the resilience of America’s shale industry in the face of the unfolding OPEC “price war”, is the pretext to host a discussion about a topic that is at once too huge to ignore, and too byzantine to elegantly comprehend. The most obvious complication — bypassed entirely by this article — is the harsher oil geopolitics, shaped by a Saudi-Russian proxy war over developments in the Middle East (and Russian backing of the Assad regime in Damascus, most particularly). I’m not expecting people here to be so ready to leave that aside.
Clearly, though, the attempt to strangle the new tight-oil industry in its cradle is a blatantly telegraphed dimension of the present Saudi oil-pricing strategy, and one conforming to a consistent pattern. If Mullaney’s figures can be trusted, things could get intense:
… data from the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 — to make a 10% return for rig owners. In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says. Another 27 rigs are around $29.
If oil-price chicken is going to be exploring these depths, there’s going to be some exceptional pain among the world’s principal producers. Russia is being economically cornered in a way that is disturbingly reminiscent of policy towards Japan pre-WWII, when oil geopolitics was notoriously translated into military desperation. Venezuela will collapse. Iran is also under obvious pressure.
How is it possible that a world run by manic Keynesians gets to quaff on this deflationary tonic? It should hide a lot of structural ruin, at least in the short term. Global economic meltdown is deferred — and ultimately deepened — once again. (We’ll probably get the war first.)
ADDED: “Saudi Arabia, OPEC’s biggest oil producer, has reportedly said the oil price should stabilize at about $60 per barrel … Many OPEC members have been put under budgetary pressure by the lower oil price,as exporting countries rely heavily on oil revenues. Iran needs a price at $140 per barrel to balance its budget. Saudi Arabia needs a price of $90.70 per barrel, as it can count on huge reserves. Qatar needs $77.60 per barrel, and the United Arab Emirates $73.30 per barrel. […] In early November, OPEC officials said the price of $70 per barrel is a threshold at which other member countries could start panicking.”
ADDED: Some oil geopolitics musings from Fernandez.