With fracking and shale oil production putting increasing pressure on OPEC, Saudi Oil Minister Ali al-Naimi issued bold and startling remarks to the Middle East Economic Survey, announcing OPEC is prepared to let oil prices fall to $20 a barrel.
“It is not in the interest of OPEC producers to cut their production, whatever the price is,” said Naimi. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.”
As Financial Times notes, Naimi is regarded as the “most influential figure in the energy industry.” According to FT, “He said the world may never see $100 a barrel oil again.”
OPEC’s decision not to cut supply and drive up oil prices is part of a new strategic shift designed to ward off pressure from the fracking and shale oil revolution. The strategy: drive oil prices lower to make more expensive shale oil production costs unsustainable and unprofitable.
However, as James S. Robbins points out in USA Today, the price pressure from fracking is likely to break OPEC’s stranglehold on oil prices moving forward:
OPEC’s gamble is America’s gain, and not just in the short term. The problem with Saudi minister al-Naimi’s strategy is that he does not have a viable endgame. Even if OPEC can hold prices down long enough for American energy companies to feel the pinch, the oil-revenue-dependent states can’t keep prices depressed forever.
When oil bottoms out and begins to rise again, fracking will once more become profitable and the cycle will repeat. And as shale oil extraction technology improves and becomes more efficient, the break-even point will decline further, making it that much harder for OPEC to wage economic war.
Naimi conceded that if OPEC cuts production, “the price will go up and the Russians, the Brazilians, US shale oil producers will take my share.”
As FT concludes, “Oil has slumped by nearly 50 per cent since mid-June amid a massive supply glut fueled by surging US shale output, combined with weakening demand for crude in Europe and Asia.”