Oil, Oil, Toil and Trouble

The fall OPEC meeting is under way right now in Vienna, and all eyes are on the Saudis, to see whether they will lead a strategy to stop the fall in oil prices, which is putting the crimp on Iran, Russia, and Venezuela, among other worthies. We’ve commented previously about what the Saudis may be up to (here and here), and today Business Insider reports that the Saudis show no interest in curtailing production to shore up the price, and in fact may be willing to go for two years or more with falling prices, with some Saudi insiders saying the real objective is to retard the shale oil revolution in the United States and elsewhere (since shale oil is more expensive to produce):

OPEC’s biggest crude producer Saudi Arabia will have its sights set on the upstart US shale oil business at a crucial cartel meeting to debate possible output cuts on Thursday.

Analysts say the kingdom is content to see shale oil producers — and even some members of the cartel — suffer from low prices and will resist pressure to reduce output and shore up the cost of oil. . .

Analysts say the kingdom is strong enough to withstand lower prices.

“Saudi Arabia wants to try and knock out shale oil competitors from the market,” said Saudi economist Abdulwahab Abu-Dahesh.

“They have the fiscal strength to remain steadfast for two to three years,” he told AFP.

Oil prices have collapsed to four-year lows on factors including dampening demand in a sluggish world economy, a sharp rise in output from shale oil and other unconventional sources, and a strong dollar. . .

Fahad Alturki, chief economist and head of research at Jadwa Investment in the Saudi capital said that as prices fall into the $70 range “we think the basic survival of the shale oil producer will be a question”.

He said the kingdom doesn’t need to make major production cuts because continuing lower prices will push shale producers out of the market, reduce excess supply and raise prices.

“So I think Saudi Arabia is happy with such a dynamic,” said Alturki.

If crushing the U.S. shale oil boom is the object of Saudi policy (doubtful this can succeed, but that’s another post), it may be time to think of some counter moves. One idea popular over the years is an oil import fee of $5 or $10 a barrel. It would put a floor under the market price of oil in the U.S., and assure the profitability (in theory) of U.S. produced oil. I’ve always disliked the idea for all of the usual reasons, but when dealing with a cartel basic principles of market economics sometimes need to yield. Among other things, it would hit consumers and oil-using industries, who are the biggest beneficiaries of the current fall in oil prices.

But I doubt we’ll see this idea proposed, for a simple reason: Who else might be in favor of the U.S. shale oil boom turning into a bust? Maybe the current occupant of the White House? Does Obama really want to help the oil industry in the U.S.? The question hardly needs asking. So maybe the clever thing would be for Republicans to propose a temporary oil import fee (expiring in two or three years) combined with opening up federal lands to new oil exploration and production. Might be fun to watch Democrats squirm over that choice.