Tuesday, January 13, 2015

The oil price collapse: did the Saudis make a smart move?

Saudi Arabia's data on oil production (all liquids). Data from EIA

Arthur Berman recently wrote this on the oil price collapse:

As far as Saudi Arabia and its motives, that is very simple also. The Saudis are good at money and arithmetic. Faced with the painful choice of losing money maintaining current production at $60/barrel or taking 2 million barrels per day off the market and losing much more money—it’s an easy choice: take the path that is less painful. If there are secondary reasons like hurting U.S. tight oil producers or hurting Iran and Russia, that’s great, but it’s really just about the money.

I think that Berman may very well be right; the Saudi really reasoned in these terms. They wanted to reduce their losses and keep their market share.

But think about that for a moment: was it really a smart move for the Saudis?

Saudi Arabia produces little in addition to oil; its economy is heavily based on oil. And even for food, Saudi Arabia must rely on revenues from oil in order to import food. And even for the mighty Saudi Arabia, oil resources are not infinite.

So, assume you have the power to regulate oil production in Saudi Arabia, what would you do? Logically, you would think that it is silly to keep pumping oil at full speed when it has become so cheap. You would reason that it is a good idea to keep as much as possible of it underground, to use when it will be really rare and expensive. In addition, your competitors will run out of oil when you still have plenty of it; wouldn't that be nice?

Logic? Sure, but only if you think long term. If you think only of the near term profit, then it makes sense to sell all what you have, when you have it. And the future? Well, that will be someone else's problem.

Unfortunately, it is not just in Saudi Arabia that they think in this way.


Ugo Bardi is a member of the Club of Rome, faculty member of the University of Florence, and the author of "Extracted" (Chelsea Green 2014), "The Seneca Effect" (Springer 2017), and Before the Collapse (Springer 2019)