THE REASON WHY OIL PRICES ARE GOING DOWN

In the past, the Organization of Petroleum Exporting Countries (OPEC) would reduce
oil production if the prices start sliding. However, this year, Saudi Arabia, the
worlds largest oil exporter, and the five Gulf States refused to cut oil production.
Their strategy was to create an oversupply situation which would bring down the
price of oil.
The main targets of this strategy are the shale oil producers in the United States,
primarily in North Dakota and Texas. The main objective is to force the shale oil
producers to either close down or reduce production. Saudi Arabia is extremely
worried that if the shale oil producers continue increasing production in the United
States and eventually in Western Europe, these countries will become self-reliant in
oil and stop importing from the Middle East. Not only will the Middle East lose their
most lucrative markets but the Western powers may even give much less attention
to the geopolitical conflicts in the Middle East.
The Saudi Arabian strategy is reminiscent of the rubber barons of the past in the
United States. How do you drive out competitors? Normally you offer a better
product. But crude oil is the same anywhere in the world. The only other recourse is
offering a lower price that the competition cannot match.
Over the past four to five years, as oil prices went up astronomically, American oil
entrepreneurs started extracting oil from shale formation. Shale is actually fissile
rock composed of laminated layers of clay-like, fine grained sediments. Oil
extraction from shale was considered unviable. However, a new technology was
invented called fracking. This entails injecting a mixture of water, sand and
chemicals into shale formations to release the oil.
The cost of producing shale oil is now estimated at $70 per barrel. If the worldwide
price of oil is below $70, it is assumed that shale oil companies will stop investing in
new oil fields. However, fracking experts are saying they can continue to reduce
cost and that the production cost of shale oil is now down to $57 per barrel. On the
other hand, Saudi Arabia has claimed that its oil has a production cost of $6 per
barrel, the lowest in the world.
This is really a battle for market share between the shale oil producers of the United
States and Western Europe and the oil producing kingdoms of the Middle East.

MARY ROSE B. BELONO

BSA-2