Oil prices are now at their lowest levels since 2003. The drop in price comes as Saudi Aramco plans to pump out around 12 million barrels per day of black gold from the 1st of April 2020, exporting most of it. Aramco spent around $35 Billion since 2012 developing production capacity to implement its present strategy. Saudi Arabia is now geared to surpass Russia and become the world’s second-largest producer of crude oil in the coming months. In the next 2-3 years, Saudi Arabia would be able to cross the USA to become the world’s largest producer of Crude Oil.
We are witnessing an expansion in Saudi Arabia’s market position. The Saudi government appears bent upon taking advantage of its low cost of production to drive out Russian and American competitors from global markets. International prices below $25 per barrel will run a large segment of American and Russian producers out of the global supply chain.
We must realize that this is no short term supply shock. Cartelization and agreements between mostly state-owned oil corporations had created an undersupply of the commodity in global markets. The undersupply will now be mitigated. Oil will be cheaper globally, we should rest assured.
Saudi Arabia is thinking about maximizing revenues. This is a major shift from maximizing profit margins, their previous guiding philosophy. The governments of oil exporter countries will lose the revenues which they generate on the price of oil, and the same goes for governments of countries that import oil and charge taxes on its sale.
Both governments of oil-exporting and importing countries will be forced to reduce their reliance on revenues extracted from oil. And we could very well expect an expansion in the role of the private sector, even though it may appear as though many private sector players are losing money at this time. Less efficient players would find it difficult to survive in a (relatively) free market.
The current shift does not drastically affect the OPEC dynamic, because most OPEC oil producers like the UAE and Iraq have comparable extraction costs to Saudi Arabia. The USA might be able to domestically absorb some of its export capacity. The most affected will be the largest oil exporter countries such as Russia and Canada.
At lower price levels, we should expect global demand to behave more elastically. The Energy Information Administration expects global petroleum demand to decrease by 0.9 Million Barrels a day in 2020, and that demand should recover and surpass present levels by 2021. Despite the improvements in renewable, we have no reason to expect oil demand to fall consistently unless/ until there is a drastic shift in the technological paradigm.
The present strategy promises to change the shape of oil to come. The lowered prices signal a move towards a more market-based price. We should see an improvement in the global cost of oil production, an improvement in production efficiency. All producers with a production cost above the global price of oil will struggle to stay afloat.
Lowered fuel costs have the power to drastically improve global productivity. Fuel costs affect every sector, and better prices for agriculture, manufacturing, and services should prove to be a catalyst in raising global demand for all commodities. With fears of a global recession looming, the Saudi policy may very well prove to be a saving grace for the entire world.
The lowered price will curb the power of authoritarian governments propped up on oil revenues. Oil corporations throughout the world would need to revamp their technologies and reduce their bureaucratic bloat to remain competitive. The organizations with the smallest proportion of fixed costs will emerge as the most competitive, regardless of the country of their origin. We may see some chaos emerge during this transition, but the long term outlook is more than positive for the global citizen.