January 13, 2015 | Policy Brief

A Milestone for Saudi Oil Policy

January 13, 2015 | Policy Brief

A Milestone for Saudi Oil Policy

For the last several years, oil produced in North America has generally sold for a cheaper price than oil imported from across the Atlantic. Earlier today, that price difference temporarily collapsed, threatening one of the most visible indicators of America’s booming energy economy.

Observers believe this price-drop is the result of Saudi Arabia’s assertive new oil market strategy: pushing rival producers out of business by letting the price of oil crash. After a modest uptick, the number of active U.S. oil rigs is now falling steadily for the first time in two years, and domestic producers are confronting a serious credit crunch as banks now consider them a riskier investment. A number of energy firms are expected to go bust or get gobbled up in the months ahead, and many of those that survive will be saving up to stay afloat at the expense of investments to pump more oil.

When the OPEC cartel of oil-producing nations gathered in November, Saudi Arabia justified its refusal to cut production levels by stressing the importance of fighting for market share against American producers. Since then, Riyadh has slapped heavy discounts on its crude sales to U.S. purchasers while letting up on its discounts applied to Asian buyers. With today’s narrowing of the spread in oil prices, American producers are likely to lose market share to imported oil.

Some observers believe the shale revolution can’t be derailed, even by the Saudis. American oil producers, they believe, may in fact be able to ride out a fall in oil prices, especially after cutting back orders from industry service-providers. Further, because wells for extracting shale oil have a shorter life span than traditional oil wells, America’s energy industry may also recover faster from this market crisis than from past bust cycles.

Saudi Prince Alwaleed bin Talal, a prominent nephew of King Abdullah, seems particularly worried that this scenario might be realized, and suggested earlier this week that global markets may never again see oil selling for $100 a barrel.

For now, Saudi Arabia does not appear to be interested in seeing the price of oil rebound. Apart from weakening the U.S. shale industry, the Saudi oil glut is deliberately hammering the economies of Riyadh’s enemies for backing the Assad regime in Syria. Russia’s currency is in freefall, and Iran’s leaders are fuming over what they call a treacherous conspiracy against the Islamic Republic. Increased economic pressure could be essential to motivating Tehran to make meaningful concessions on its nuclear program.

The Kingdom of Saudi Arabia is showing remarkable willingness to inflict financial pain on allies and enemies alike, and appears to have the stamina for a lengthy commitment. If oil were to average out at $55 dollars a barrel, as analysts at Citi predict for 2015, the Saudis reportedly have enough savings to sustain their current posture for almost a decade.

David Andrew Weinberg is a Senior Fellow at the Foundation for Defense of Democracies. Follow him on Twitter, @DavidAWeinberg