The bear market in oil is showing the world there's still only one country in a position to choose winners and losers in the global market: Saudi Arabia.
The world's largest oil exporter is trying to protect its market share by keeping its production steady even as prices hit a four-year low. Energy producers in turmoil, such as Russia, Iran and Venezuela, stand to lose the most, U.S. shale drillers and other Saudi rivals will suffer and industrialized importing countries including Japan will get a boost from cheaper prices.
"Saudi Arabia is the only one in the position of putting more oil on the market when they want to and cutting production when they want to," said Edward Chow, a senior fellow at the Center for Strategic & International Studies in Washington. "Consumers win, producers lose."
Brent crude, the international benchmark, fell as much as 29 percent since June 19 to $82.60 a barrel, the lowest since November 2010. Prices have averaged above $105 a barrel since 2011, the four highest years on record. Brent will stay higher than $80 a barrel, analysts at Bank of America Corp. and BNP Paribas SA said Wednesday.
While cheaper crude erodes Saudi Arabia's income, too, the country has enough reserves and credit to withstand the slump, Chow said. The kingdom needs $83.60 a barrel to balance its budget, and the central bank has $734.7 billion in reserve assets, the International Monetary Fund said. The Saudis ran deficits from the mid-1980s until the late 1990s and may be prepared to do so again, according to Chow. Brent traded at $82.96 as of 12:58 p.m. in London.
Increased Output
Kuwait, Qatar and the United Arab Emirates should be able to weather lower oil prices for the same reasons, Fahad Al-Turki, head of research at Jadwa Investment Co. in Riyadh, said by phone Oct. 15. Countries that haven't been able to save, such as Iran and Iraq, will be more vulnerable, he said.
Saudi Arabia increased September output 0.5 percent to 9.65 million barrels a day, according to data compiled by Bloomberg. The Organization of Petroleum Exporting Countries pumped 30.9 million barrels a day, the most in a year. Saudi Arabia, Iraq and Iran are offering the biggest discounts to crude buyers in Asia since at least 2009.
"The Saudis are trying to protect their patch in Asia," Daniel Hynes, senior commodity strategist at Australia and New Zealand Banking Group Ltd., said by phone from Sydney Oct. 15.
With new drilling technologies pushing U.S. output to the highest in 28 years, the International Energy Agency predicted the U.S. would pass Saudi Arabia to become the world's top producer by 2015.
Shale Boys
The Saudis are having none of that, T. Boone Pickens, the founder and chairman of BP Capital LLC, said Oct. 9 on Bloomberg Television.
"They may be just teaching the crowd in the U.S., the shale boys, a lesson," Pickens said.
Lower prices could slow the U.S. boom because extracting oil from shale costs $50 to $100 a barrel, compared with $25 a barrel for conventional supplies from the Middle East and North Africa, according to the IEA.
The Saudis, OPEC's biggest member, might actually want the price collapse because it hurts rivals Iran and Russia in addition to slowing U.S. drilling, said Bruce Jones, a senior fellow at the Brookings Institution in Washington.
The government in Tehran faces falling energy sales, its main source of proceeds, because of international sanctions over its nuclear program. Revenue from oil and gas exports fell to $56 billion in the 2013-2014 fiscal year, from $118 billion in the year ending in March 2012, the IMF said. Negotiators are seeking a comprehensive nuclear accord by Nov. 24.
Vulnerable Russia
"Knowing that Iran is going to struggle, that's something Saudi Arabia would certainly enjoy," said Reva Bhalla, vice president of global analysis at Stratfor, a geopolitical intelligence and advisory company based in Austin, Texas. Falling oil prices "put all the more pressure on Iran to try to seal a deal."
Russia is also vulnerable because of its dependence on oil sales at about $100 a barrel, Bhalla said. U.S. and European sanctions over Russia's involvement in Ukraine sent the ruble to a record low and the IMF reduced its forecast of economic growth for 2015 to 0.5 percent.
Oil at $90 a barrel will cut 1.2 percent from Russia's GDP, according to Sberbank CIB, an investment bank.
The Russian budget loses about 80 billion rubles ($2 billion) for every dollar the oil price falls, according to Maxim Oreshkin, head of strategic planning at the Finance Ministry.
Importers Gain
Consumers in importing nations also stand to gain, especially in Japan, China and Europe, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.
