Gilbert B Norman wrote:All told, if the Sheik of Araby decides the price of crude is too high, Allah will tell him to flood the market to get the price at a level where his brew is price competitive.
Disclaimer: author holds long positions XOM RDSA
Mr. Norman,
Here are my thoughts regarding market mix.
1. You are entirely correct that the extraction cost per barrel for typical Arabian light sweet crude is indeed very low. Basically in many places it's surface oil and I have indeed seen photos from Kurdistan (Iraq) showing places where the oil still pools naturally on the ground (and has yet to be extracted).
2. As of this very moment the Saudis are pumping at about 10 - 10.5 million barrels per day (close to their peak theoretical capacity of 12.5 million bpd). What is interesting to note is that the last 2 million bpd of production is not as cheap as the first 10. I don't know the exact details but my understanding is that these additional barrels are in fields which are more expensive (by their standards) for them to extract, and they have a lead time of 90 +/- days to resume production. In effect this means that the Saudis are pumping close to or at their ideal technical capacity.
3. Bottom line: no one is presently capable of "flooding the market". Virtually all available economic capacity is in production and what is left is marginal at best. The example you may be thinking of, which occurred in 1985 when the Saudis "opened the gusher" and crushed the Soviet Union's market for oil exports is no longer possible today due to the present utilization levels of production.
Because Arabian crude is priced in a similar (and more politically sensitive) bracket as "Brent" crude I think that American crude is going to have an advantage for quite some time to come. This in effect represents a restoration of the "way things were" in the 1940s (stable U.S. energy exports powering the world) and in my opinion means the U.S. economy is in for a major period of expansion.
Obviously alternatives are always possible but I am having trouble seeing how becoming a net exporter isn't going to lead to major economic expansion.