In a country that never tires of hearing itself described as “a nation of innovators,” the idea that one such innovation — the shale oil boom — has galvanized the world’s most powerful cartel, OPEC, to launch a campaign to snuff it out has obvious appeal.
But like most Hollywood notions of reality, however, this one is too good to be true.
Despite repetition in countless media accounts and analysts’ notes over the past few weeks, though, the idea of a “sheikhs vs. shale” battle to control global oil supplies has precious little evidence behind it. The Saudi-led decision to keep OPEC’s wells pumping is a direct strike by Riyadh on two already hobbled geopolitical rivals, Iran and Russia, whose support for the Syrian government and other geostrategic machinations are viewed as far more serious threats to the kingdom than the inconvenience of competing for market share with American frackers.
Among the world’s oil producing nations, few suffer more from the Saudi move than Tehran and Moscow. At a time when both are already saddled with economic sanctions — Russia for its actions in Ukraine and Iran for its alleged pursuit of nuclear weapons technology — the collapse of oil prices has put unprecedented pressure on these regimes. For Russia, the crisis has hit very hard, with the ruble losing 40 percent of its value to the dollar since October. This is particularly problematic since Russian state-owned oil firms have gone on a dollar-borrowing spree in recent years; now, servicing that debt looks very ominous.
True, Saudi OPEC minister Ali al-Naimi insisted last month that the move was intended to target shale. But he would say that, wouldn’t he? After all, his OPEC counterparts were standing beside him — including the OPEC minister from Iran.
The fact is, Saudi Arabia has little to fear from shale. Saudi Arabia’s huge reserves of conventional oil can and probably will be produced for decades after the shale boom has run its course — which the U.S. Energy Information Administration (EIA) expects to happen by 2050 or so — and at much lower costs.
The numbers indicate that Saudi Arabia’s suffering from the so-called “shale revolution” has been quite minimal. Think of current oil prices as the result of new supply sources combined with lower growth (and thus oil demand) in China, the European Union and a host of other medium-sized economies: While the U.S. surge in tight oil production has brought the country’s production to over 9 million barrels per day (bpd), rivaling Saudi output at 9.8 million bpd, the missing Chinese and European demand more than equals the additional U.S. supply.* Experts differ on the tipping point for the decline in oil prices, but a strong case can be made for the October meetings of the International Monetary Fund, following a very bearish IMF quarterly update that showed emerging market growth down significantly.
But the United States is importing less oil, you say, and the Saudis don’t like that. Perhaps, but it is not really hurting them much. Because U.S. refineries are geared to accept very particular grades of oil, the sudden appearance of an ocean of domestic U.S. “light crude” means that almost all the “lost” market share has fallen on African oil producers: Nigeria, Angola, and Algeria, in particular, whose own light grade crude has been displaced by oil from the U.S.-based Marcellus, Bakken, and Eagle Ford shale fields.
Another fallacy is the idea that there is a “bottom” for U.S. tight oil producers — that is, a price at which the shale revolution will grind to a halt. While it may make sense to discuss that concept with a monolith like Russia’s state oil industry or even PEMEX in Mexico, U.S. tight oil derived from shale looks more like a constellation. Industry estimates vary greatly on how low prices would have to go to shut down a significant portion of shale production, but most agree that even at $60 per barrel a majority of players will remain solvent — particularly in a world where all the other factors suggest prices will ultimately bounce back up.
If China’s emerging middle class stopped buying cars, Europe never exited its recession, and emerging markets like Brazil and India stayed in the doldrums, then the Saudis might be able to undermine fracking. But that’s not the world we live in. Much more likely, this period of low oil prices will be temporary, causing a wave of buyouts and perhaps a few small bankruptcies among shale producers that ultimately produce a stronger industry. Weaker firms will be absorbed, and marginal plays outside the “sweet spots” will be mothballed — at least until prices rise again.
Now consider the geopolitical case. The animosity between Saudi Arabia and Iran, longtime rivals for preeminence in the Middle East, kicked into high gear after the Iraq War. The Saudis viewed the replacement of Saddam Hussein, a reviled but largely defanged Sunni dictator, with a pro-Iranian Shiite regime in Baghdad as a strategic disaster. The outbreak of civil war in Syria, and the overt support provided by Iran and Russia for President Bashar al-Assad’s government, was the last straw. Iran’s subsequent support to the Shiite Houthi tribe as it toppled Yemen’s government was icing on the cake.
The Saudi decision not to try to arrest the slide in oil prices, meanwhile, avoided a bigger strategic disaster for Riyadh. Had they made the attempt, they risked providing evidence that such an act is now beyond even the Saudis, undermining their claim of being the most important player in global energy markets. By deciding not to act, Saudi Arabia has not only inflicted severe economic pain on its rivals, but it has also deftly reinforced Riyadh’s centrality as the only oil producer truly able to influence global oil markets on its own.
The Saudis likely consider this a particularly important message to deliver now, given their fears that a successful conclusion to the nuclear talks with Iran will cause Washington to cozy up to Tehran. But the idea that the conclusion of a verifiable nuclear proliferation treaty will mean the end of 40 years of pragmatic power politics between Washington and Riyadh is fanciful: Remember, even when the Shah was in power, the Saudis managed to purchase AWACS airborne radar planes and eventually F-16s, M1A1 Abrams tanks, and a lot else besides. Being the world’s main source of spare oil production capacity has its perks.
Whether or not their concerns are valid, it’s these geopolitical questions swirling around Iran and Russia that Saudi Arabia is concerned about — not launching a plot to “find the bottom” of the shale revolution. The Saudi imperative today, as it has been for decades, is to reinforce its importance as a U.S. ally and bolster its claim to leadership of the Arab world and stewardship of Sunni Islam. And it just might work: When it comes to the relationship with Washington, nothing says “we love you” like undermining the Russians. It worked in Afghanistan, and it’s working again now. If the “shale revolution” hits a bump in the road as a result, that’s an extra bonus for the world’s biggest oil producer. But it’s hardly the main point.