With a precipitous slide in the price of oil to less than half its July 2014 highs, markets around the world are watching Saudi Arabia closely as they try to figure out where the bottom might be for oil prices. But given its low extraction costs, significant capital investment in production infrastructure and large capital reserves, Saudi Arabia is positioned to withstand low prices for some time.
The drop in oil’s price and the near to mid-term expectations for oil markets were two topics of discussion in SUSTG’s recent FocusKSA discussion with Dr. John Sfakianakis, Regional Director for the GCC for Ashmore Group.
For Saudi Arabia, the policy is “basically to maintain market share,” Sfakianakis told SUSTG’s Richard Wilson. With so much new production coming online, Saudi Arabia wanted to avoid a repeat of the 1980s when it cut production and lost market share.
“Saudi Arabia looked around and took a bold decision…So the question is how long can you sustain it? For Saudi Arabia, the answer is quite some time” because Saudi Arabia is in a very comfortable position in the short to medium term, Sfakianakis said.
When asked where prices might go from here, Sfakianakis answered, “The downside to oil prices is exaggerated now, but I think a year from now we will see oil’s price around the low $70s.”
Saudi Arabia as Swing Oil Producer
Having committed the tremendous amounts of capital investment required to maintain spare capacity, Saudi Arabia is still the swing producer in oil markets, Sfakianakis said.
The shale boom has been “good for the U.S. because it lowers American current account deficit, but they are far away from being a swing producer like Saudi Arabia.”
“The shale story is all about producing today, and the U.S. doesn’t have the same reserves” or ability to step in during crises and increase or decrease production in the same way Saudi Arabia can, Sfakianakis said.
