WHAT IS SAUDI ARABIA’S OIL PLAN?

Low oil prices are either a boon a bane depending on how much of it you produce and consume. Over the last one year, oil has lost over 50% of its value, coming down from $100 a barrel to under $50. In this article, we give you a short summary of what Saudi Arabia and OPEC are shooting for.

Unless you’ve been living under a rock for the last few months, you will know that the price of oil has hit rock bottom and has shown no hurry to budge. The slide started around July 2014 where oil traded at around $110 a barrel, and by Jan 2015, it had slid all the way down to $50. Ever since then, it has shown no inclination to break off the $50 barrier, and even today it is trading at $48.

There are many theories floated around for this. Some say it is all a big conspiracy. Others say that renewable energy is finally making its bid. But more than anything, it is the supply side of the equation that looks interesting. Saudi Arabia, the world’s biggest oil producer, has taken it upon itself to snuff out all competition (in the form of shale oil in the US) by pricing oil at a ridiculously low rate that is aimed at blowing every other player out of the market.

Undercutting price of product for market share is not a new strategy, and this will not be the last time it will be tried. But such price wars typically tend to be long-drawn affairs, and they end only when all the parties have bled enough. So while the low price of oil has resulted in massive losses for oil companies and slowing inflation across the globe, Saudi Arabia has stated categorically that they do not plan on bringing back the price of oil any time soon.

Efficiency is the buzzword here. Less efficient oil-producing companies like Russia, who need oil to be over $100 to be profitable, will be kicked out of the market if the tactics continue over a longer period.

Saudi Arabia is even open to taking some perceived loss with respect to sovereign rating cuts from S&P because of the reduced profits it is taking in due to the price drop. Saudi oil minister, Ali al-Naimi, said that in all capitalist endeavours, only the most efficient players deserve market share. ‘We’re only telling the world that high efficiency producing countries are the ones that deserve to have market share,’ he said.

It is difficult to tell when – and if – oil will ever regain its lost value, but Saudi Arabia seems to be dug in for the long haul.