Publications: Notes at the Margin

Did the Fracking Trap Catch the Oil Producers' Coalition? (January 11, 2021)

 

Saudi oil minister prince Abdullah Aziz bin Salman says he admires Alan Greenspan. Numerous reports state that he has studied the actions taken by the former chair of the Federal Reserve, who was once described as "the Maestro." In September 2019, bin Salman demonstrated he had learned well when Saudi Arabia acted quickly to fill the potential supply gap created by the drone attacks on its oil facilities only weeks after he took office.

 

In recent months, though, his Greenspan lessons seem forgotten. The Saudis' unilateral decision on January 5, 2021, to cut oil production by one million barrels per day will not be viewed as Maestro-like action. On the contrary, the decision, like one taken by Saudi Arabia in the summer of 2015, suggests the world’s leading oil exporter continues to act in its own interests rather than as the "global central bank of oil." The consequence will be lower long-run income for most oil-exporting countries as US production surges back. Saudi Arabia's long-term revenue, though, may rise.

 

The [current OR expected?] high prices should boost US production unless "signaling" (in some instances, a per se violation of antitrust laws) by key independent oil producers causes US companies to change behavior. Several US firms have signaled other US producers to refrain from boosting output in January. The Biden administration will investigate if these companies refuse to drill more as prices rise.

 

The OPEC+ coalition has fallen into the fracking trap described in last week’s report, pushed there by the oil price rise and the Saudi decision to cut output. World oil prices will likely be lower in one, two, or three years, as will the incomes of many oil-exporting nations and oil companies. A few countries, however, will likely do better, especially Saudi Arabia. US producers of "short-cycle oil" (i.e., frackers) will also probably do fine. Russia and the multinational oil companies formed at the end of the twentieth century will not.

 

This report lays out the outcomes of the Saudis' January 5 decision.

 

To receive the full report along with futures issues of Notes at the Margin, please Contact Us or send us an Information Request for subscription information.