Opinion: The Saudi Oil Price War Is Backfiring
12 August 2015
by Gaurav Agnihotri of Oilprice.com
Saudi Arabia has long enjoyed the status of being the top crude oil exporter in the world. With record production of 10.564 million barrels per day in June 2015, Saudi Arabia has been one of the major driving forces behind the current oil price slump.
The Saudis have kept their production levels high since last year in order to drive other players (especially US shale drillers) out of business. Equally clear is the fact that this strategy of maintaining the glut and driving out rivals hasn’t worked so far.
Even when we look at the refining sector, we see that the oil kingdom has been following a similar strategy of flooding the markets with refined fuel. The Saudis have already sparked an oil price war with the Asian refiners downstream by offering close to 2.8 million barrels of low sulfur diesel to the European and Asian markets. This has caused Asian refining margins to fall drastically, the effects of which can ironically now be seen on Saudi Arabia itself.
Saudis are now reducing their crude oil price hikes in Asia in order to save their market share
As the refining margins have fallen in Asia, refiners there have been compelled to cut their refining outputs. This could eventually result in refiners cutting their crude oil imports.
Asia has been one of the biggest cash cows for Saudi Arabia and there have already been some cuts in some of the most crucial markets. India, which was earlier importing most of its crude oil from Saudi Arabia, is now changing its strategy and buying more crude oil from Nigeria, Iraq, Mexico and Venezuela.
This made the Saudis blink and they started offering discounts on its medium and heavy grade crude oil to Asian customers. And, in a latest development, the Saudis are now trying to defend their market share as they have only marginally increased the price of the crude oil they sell to Asia, contrary to industry forecasts.
According to a survey by Reuters on 3 August, Saudi Aramco was looking to hike the official selling prices of its crude oil (all the three grades) by around $1 per barrel from September 2015. However, the Saudis know very well that their selling prices are already high and a further substantial price hike might result in customers moving to other crude oil producers (much like what India did). The result is that the price hike on its medium and heavy grades is less than half of what the analysts expected while the price hikes in its flagship Arab light grade is below earlier predictions. This cautious move suggests that Saudi Arabia is on the defensive, hoping to protect its market share.
Is Saudi Arabia losing the oil price war?
“It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run. The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” said a recent stability report by the Saudi Central Bank.
In short, Saudi Arabia’s policy of keeping production levels abnormally high and driving out U.S. shale producers simply hasn’t worked. Even as US shale hedges are about to expire, some of the imminent bankruptcies would not result in wells getting abandoned, it would only result in cheaper acquisitions of bankrupt companies by their much bigger competitors. Once oil prices again rise to $60 per barrel levels, the bigger oil companies would naturally ramp up their production levels which would in turn increase US crude oil production.
Thanks to its generous public spending and a costly war against Yemen, one of the major worries for Saudi Arabia is that it is burning through its foreign reserves at an alarming pace. According to the IMF, Saudi Arabia’s fiscal deficit could rise to around $140 billion by this year end. From all this, it seems that the Saudis are now getting beaten in their own game and have been trapped in the oil price war that they themselves created.
Gaurav Agnihotri is an ME and an MBA-Marketing, and an oil and gas professional based in India. Having started his career with Essar Oil Limited as a Graduate Engineer Trainee, he was involved in the Essar Oil Limited’s Refinery Expansion project in Vadinar, Gujarat, India.
He is author of “Oil—Past, present, future—An Indian Perspective”. He has dealt with dealt with oil companies such as ONGC; Oil India limited IOCL, BPCL, HPCL and others.
When there is limited supply, OPEC could control the market. When there is abundant supply of a commodity, you maneuver for market share. That is what the Saudis are doing. And that means more supply and lower prices.
Posted by: JMartin | 12 August 2015 at 08:21 AM
I don't think it is unrealistic to imagine that in 5 to 10 years batteries will have progressed to the point that EV's will start to take a substantial bite out of oil demand.
Is it possible that we are witnessing the beginning of the end of oil?
Posted by: Calgarygary | 12 August 2015 at 09:34 AM
Yes, more efficient ICEVs, HEVs, PHEVs, BEVs and FCEVs will progressively reduce oïl consumption.
New Jet aircraft are 15% more efficient and new adaptive Jet engines will supply another 25%.
The world's oil consumption may never reach 100+ million barrels/day before it starts going down (by 2020 or so).
Will much cheaper oil ($30/barrel) have a disturbing effect? The time may be ripped to start a common sense progressive carbon fee on all fossil and bio fuels.
Posted by: HarveyD | 12 August 2015 at 11:19 AM
All these fuel saving technologies have already been developed and it seems to me that if governments chose to impose them on consumers, the long term economic consequences would not be terribly negative and in some instances would likely be positive. Even though the consumers don't like the cars much now I'd bet the autoco's would quickly figure it out (or die).
My guess is that the major oil companies already realize that the end could come sooner than their 50 year forecasts even though one does not see much public acknowledgement from them of that possibility.
Posted by: Calgarygary | 12 August 2015 at 12:32 PM
It is appealing to believe that Saudi is playing an International Domination game - as mainstream media is clamouring for eyeballs. Don't believe it for a moment. They are actually acting in a very sensible and pro-economic (domestic) way. With oil prices low and refinement prices being driven down, now is the time to deleverage away from the huge subsidies granted to its citizens on fuel. With prices low, the incremental increases are small compared to $100 oil and the consequent huge price shock that would have to come if gas prices approached cost. With costs likely to bump around the $40 - $60 for the foreseeable future, the Saudis are weening their citizens off of a huge domestic budget expenditure, providing incentive to adjust businesses to a more realistic cost structure. The Saudis care not for international oil drama - it is now about diversification, market-driven pricing, and pushing an economy into modernity.
Posted by: Jer | 12 August 2015 at 04:13 PM
"I don't think it is unrealistic to imagine that in 5 to 10 years batteries will have progressed to the point that EV's will start to take a substantial bite out of oil demand."
Batteries are already "good enough". The task at hand is to get their prices down some more.
When the Gigafactory comes online it is expected that cells will cost about $130/kWh and turning them into a battery pack will add about 30%. That would put the 50 kWh pack expected in the new GM Bolt and Tesla Mod3 at about $8,500 which is getting close to the cost of an ICE.
Based on materials costs the Tesla/Panasonic cells should drop to around $100/kWh which would bring the cost of same-model EVs below ICEVs.
Better batteries will certainly be welcomed, but more like icing the cake.
Posted by: Bob Wallace | 12 August 2015 at 05:45 PM
Then you need the always-on electricity to charge those cars, which Bob's non-solution is inherently incapable of supplying.
Posted by: Engineer-Poet | 12 August 2015 at 08:12 PM
Against all these (very real) improvements in batteries and fuel consumption, you have the enrichment of the developing world. Countries such are India, China and not parts of Africa are becoming much richer and one of the things they will do id buy and drive cars. Thus the demand for cars, petrol and diesel will remain robust in the mid term.
They won't be able to pay top dollar for the cars, so they will go for the cheapest ICE cars unless their governments prevent them.
So I wouldn't be too optimistic about the end of oil. The amount of oil per head of population in the developed world will certainly fall, but the amount overall will increase due to the development of the developing world.
Posted by: mahonj | 13 August 2015 at 12:53 AM
Smart chargers may be able to recharge 50% to 60% of all electrified vehicles, at a lower rate, outside peak demand periods.
The other 40% to 50%, without unlimited access to smart chargers, may have to pay a premium (2X to 3X) price. Many pay roads and pay bridges use similar variable pricing approach.
Most countries can produce all the clean electricity required at an affordable price. It is a mature well known technology with lots of potential suppliers.
The initial purchase price of future extended range BEVs and FCEVs may be higher than current equivalent polluting ICEVs but the life time total cost per Km may be less.
Posted by: HarveyD | 13 August 2015 at 11:03 AM
"Then you need the always-on electricity to charge those cars,"
Is there anything more extreme than 180 degrees wrong?
There is no need for always-on electricity for EV charging. In fact, EVs should be a massive dispatchable load which will allow much higher wind and solar grid penetration without storage.
EVs will need to be charged, on average, about 3 hours per day on a 240 vac line. US cars spend about 90% of their time parked (over 21 hours a day). EVs can be charged when wind and sunshine are more available and drop out when grid supply is stressed.
As ranges increase many EVs will be able to go multiple days without charging during those few times a year when both wind and solar inputs are low.
Posted by: Bob Wallace | 13 August 2015 at 12:16 PM
There's being 180° wrong AND banning your challengers from your blog. Speaking of which, are you ever going to admit you were wrong to do that, or is Cleantechnica implicitly an echo chamber?
The unstated assumption here is that EVs exist to make certain generation (wind and solar) feasible. This is 180° opposite the truth: the generation exists to serve the loads, of which the EVs are one. Generation which can go AWOL for weeks at a time is useless for keeping EVs with today's limited ranges working at their primary job (moving people and goods around).
PHEVs have far greater near-term potential for displacing liquid fuels, but they require just-in-time delivery of power even more than EVs. Only when they are parked for long, predictable periods can they be used as dispatchable loads.
Nuclear power out-classes all the unreliables in carbon-displacement capability; all the grids in the world which achieve carbon emissions less than 100 grams per kWh use some combination of nuclear and hydropower. Having predictable power surpluses almost every night allows a massive EV fleet to rely on that power being available. No such reliance can be placed on wind, solar or any combination.
Posted by: Engineer-Poet | 14 August 2015 at 09:42 AM
You may not be aware, but the real price war is now between gasoline and diesel. Due to optimization of refinery design and limits to diesel adaptability (eg. heating oil is not used during summer), diesel would be first to be dumped, while refiners and oil majors will merely produce gasoline at full tilt to reduce equipment margins from well to tank truck, and fight for market share.
This is a very good time for the US to push clean diesel over ethanol for passenger vehicles and our refineries will adapt to lower oil imports and refinery specialization in condensates for other products.
Posted by: kalendjay | 15 August 2015 at 01:33 PM
There's the glut of diesel being produced in the Middle East, and there's also the summer driving season in the US and the "renewable" fuels mandate which makes it costlier to meet the vapor-pressure limit required of summer fuels.
Posted by: Engineer-Poet | 16 August 2015 at 09:02 AM
e-p, you claim that wind and solar go away for weeks at a time and in support you link an example where wind dropped low for 7 days. You fail to demonstrate that wind was absent for the entire Western grid for that period and that there was no solar input.
I'm not going to get into a slingfest with you over nuclear. You keep dreaming your nuclear dream. The rest of the world is moving to renewable energy.
Posted by: Bob Wallace | 16 August 2015 at 10:59 AM
Read it again, especially the updates. Wind was effectively zero from 1/16/2014 to about 6 AM 1/29/2014—nearly two weeks. Even a couple DAYS AWOL spells major trouble for your EV-dependent scheme (or maybe you expect to supply wind on demand from teams of professional hand-wavers like yourself).
Only every wind farm in Idaho, Oregon, Washington, and parts of 6 other states. What evidence do YOU have that there was sufficient wind nearby (where a grid of reasonable cost could reach) to make up for that deficiency?
It was January in the northwest, Bob. JAN-YOU-AIR-EEE. Seasons, do you understand them?
Moving to lignite, you mean. Germany's power is grossly dirty, as is Denmark's. Meanwhile China, Russia and S. Korea are building nuclear like nobody's business and selling it internationally. The UAE has two units scheduled to go on-line in 2017 and 2018, with 2 more planned. Even Saudi Arabia has plans for SIXTEEN reactors but has tabled them (likely due to low oil revenues).
Posted by: Engineer-Poet | 16 August 2015 at 03:31 PM
Posted by: Bob Wallace | 17 August 2015 at 09:51 AM
REs, BEVs and FCEVs are either here or coming soon.
The very few (very costly) NPPs being built is not enough to cope with the world's e-energy consumption rapid increase, let alone replacing the older NPPs and older CPPs.
In many countries (China, USA, India, Spain, Italy, Germany, Denmark +++), REs are being used to do that.
Combining (variable) Hydro and Wind power plants is a sure way to get up to 40% from wind turbines while reducing the use of accumulated water in Hydro's reservoirs and get clean electricity 24/7 at the same time.
Posted by: HarveyD | 17 August 2015 at 11:47 AM
Bob non-answers with:
READ IT AGAIN, BOB. On the Friday 1/17 load peak at about 8 AM, BPA load was about 8500 MW while total generation was about 14000 MW. There was no California wind or solar riding to BPA's rescue that day, or any day; the Pacific intertie was feeding California's needs with BPA exports to the tune of over 5 gigawatts. Generation consistently exceeded load for the entire 2 weeks.
This is obvious if you just bother to look at the data. Seriously, the only thing more delusional than you "Cleantechica" people is giving you any authority whatsoever over energy supplies. Your disconnect from reality would lead to disaster in short order.
Posted by: Engineer-Poet | 17 August 2015 at 09:07 PM
e-p, are you actually an engineer?
I would think most engineers would look at what could be built rather than looking at what has been built to date and stopping there.
The Pacific and Intermountain Interties are in place. It looks like they will be connected on the north end and a spur will be extended to Wyoming wind. The lines can be upsized is needed, the route is in place which is the hard problem.
Before you look at a period of low wind in one part of the Western grid and declare renewables impossible it would be wise to expand your thinking to a modernized grid which can shift larger amounts of power from where it is available to where it is needed.
It seems to me that you have an enormous desire to find a role for nuclear energy, in spite of its high cost and associated problems. That desire puts blinders on your imagination and understanding of what is happening around the world.
Posted by: Bob Wallace | 18 August 2015 at 07:50 AM
That's why you're not an engineer. Engineers begin by defining the problem and then examining solution elements for, among other essentials, fitness for purpose. An intermittent source of power which can disappear for weeks on end is quite literally not good for very much; the only thing it can truly do is displace some (far from all or even most) fuel consumption in dispatchable generators, or water behind dams. If it's arriving when you have a surfeit of water (spring melt) and need to run the hydro at max, it's totally useless.
And they were exporting power all the time, not bringing in wind or solar from California to the dark and becalmed BPA. Those exports were roughly equal to the thermal generation, so if you got rid of the fossil-burners and the CGS nuke plant BPA would have had no surplus.
Wrong problem definition, Bob. The problem is not "how do we try to run everything on generation with the crap characteristics of wind and solar"; if you think that way, you create problems rather than solving them. Every dollar spent on lines to move power from one area of intermittent surplus to another of intermittent deficit is a dollar that can't buy carbon-free generation. Rube Goldberg schemes can't do the job period.
Thanks for the textbook example of projection, Bob. "Green" policy has been to cram "renewables" onto the grid regardless of the problems they cause. They are truly without a role. Nuclear's role is simple: it supplies carbon-free base-load generation and reactive power, replacing coal-fired plants and eliminating all their emissions. There are multiple places where nuclear power has been doing for decades what "greens" like you can only claim "renewables" can do, and despite decades of policy supremacy and billions in spending you still have no proof it can be done at all.
The high costs and long schedules were a consequence of a major policy shift. My solution is simple: change the policy back. We especially need to revisit the basis for so much of this policy, which assumes that all radiation is harmful. We know this is false now, and also how the Rockefeller-financed committee which came up with that conclusion committed scientific fraud. In short, the entire threat model used to justify the ever-more-stringent radiation protection regs is bogus and is actually doing large amounts of harm by denying e.g. sufficiently well-resolved medical images to allow accurate diagnosis and treatment.
Your desire to see everything "renewable" makes you miss the fact that nuclear power can do everything from supplying motive power, fresh water and air for months at a time to a crew hundreds of feet deep in the ocean to powering a space buggy on Mars and probes out at the extreme reaches of the Solar system.
Nuclear power is capable of supplying the electric power, space heat and even the fresh water of entire cities 24/7/365 with no air emissions, carbon or otherwise. "Renewables" cannot do this. It is a question of fitness for purpose, and the Cleantechnica-approved methods fail.
Posted by: Engineer-Poet | 18 August 2015 at 07:50 PM
e-p, I'm not going to spend my time rebutting your foolishness. You are so blinded by your love of nuclear energy that you are unable to think rationally and problem solve.
If anyone else has a question I'll be glad to attempt an answer.
Posted by: Bob Wallace | 19 August 2015 at 09:27 AM
Projecting again. "Renewables" were the majority of human energy use up to the 19th century, and they caused immense problems including widespread ecological damage from deforestation. Coal literally saved Europe's forests. You are unable to deal with the failures of "renewables" rationally because you are either ideologically or financially locked into them. This is why I keep asking you to SHOW ME WHERE IT'S BEEN DONE, and you never give me an answer.
Show me something that can run our industrial society without air emissions as well as nuclear power, and I'll love it just as much. SHOW ME. That means an existence proof, not a Jacobson paper where he hand-waves intermittency away.
There is a solution to solar intermittency: go up into space where clouds and night are not a factor. As a rule, "greens" hate this idea. Don't like my solution? YOU come up with one or shut up.
I will spend a modicum of time listing and mocking your foolishness, which you are afraid to let me do on Cleantechnica. You are right to be afraid; I would not hesitate to turn you into a laughingstock on your own site.
Posted by: Engineer-Poet | 19 August 2015 at 03:02 PM
E-P is absolutely right, and imminently logical on intermittency. I am a practicing engineer for over 20 years, with no emotional or financial ties to renewables or nuclear. I grew up in BPA country and believe me when its -20 F you need power, and it can get very calm.
Posted by: Tim Duncan | 20 August 2015 at 04:49 AM
At $0.16+/kWh with initial building cost and time required going up + unknown insurance cost + unknown spent fuels disposal cost + lowering public acceptance; nuclear energy still has major bridges to cross.
Meanwhile, REs + 24/7 storage cost is going the other way and will soon be less than 50% the equivalent nuclear cost.
Ontario, Canada has a major problem with its older (18) CANDUs and most USA's units will soon be in the same situation.
France is seriously considering the replacement of 50% of its existing 58 NPPs with REs + 24/7 storage.
Germany is phasing out all its NPPs.
Japan is having strong resistance to restart its NPPs.
Are all those (smart) people wrong?
Posted by: HarveyD | 20 August 2015 at 07:38 AM
Tim, as an engineer you might want to read a paper written by other engineers who pulled the data together for the state of Washington and calculated the best mix of renewable inputs needed to keep lights on and toes warm 24/365.
Posted by: Bob Wallace | 20 August 2015 at 10:48 AM