The Oil Price War

The talk on the Street is that there is an oil price war sparked by Saudi Arabia.  The surge in oil and gas production due to fracking in the US has increased the supply, putting downward pressure on prices.  The cost of producing oil by the Saudis is estimated at $20 per barrel, lower than the cost of production via fracking.

However, the Saudis, and many other producers have swollen public budgets which depend on the continuing profits from oil.  Throw those costs into consideration and some estimate that the Saudis need oil to be priced at $90 to $100 to cover all the services the government currently provides.

Other countries that depend heavily on high oil prices to support their public services are Russia and Venezuela.

Wood Mackenzie, a global energy consulting group, surveyed 2,222 oil fields worldwide and found that at $50 a barrel – around where Brent crude trades now, only 0.2% of oil supply faces negative cash flow. At $40, that figure rises, but only to 1.6%.

That means that oil prices would have to go a lot lower if the Saudis are to be successful in shutting down a lot of current production.

The Saudis have foreign-exchange reserves roughly equivalent to their annual gross domestic product.  It remains to be seen how this oil price war ends.

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