Who is to Blame for the Plummeting Oil Prices?

05/02/2015 13:26 GMT | Updated 07/04/2015 10:59 BST

When oil prices skyrocket we blame Saudi Arabia and when the price crashes, we blame Saudi Arabia.

The latest oil shock has seen crude oil prices trading below $50 per barrel as prices plummeted by 60% since last summer.

Royal Dutch Shell has already said it will cut spending by £10 billion over the next 3 years, in response to marker oil prices which have fallen from $114 to $47 a barrel over the last half year. All the oil majors are in a similar position.

According to The New York Times ConocoPhillips reported huge losses for the first time since 2008.

Historically Saudi Arabia was always to blame when prices of oil were too high--now prices are at their lowest since 2009, and ironically Saudi Arabia is still being blamed. The collapse of oil prices is hurting badly, with Iran, Russia, Venezuela, shale oil producers in the USA, and offshore producers in the North Sea and the Gulf of Mexico all pointing the finger at Saudi Arabia.

The passing of King Abdullah of Saudi Arabia recently will not result in a change of Saudi oil policy. All the indications are his successor King Salman will pursue the same oil policies as before. According to Bloomberg 26th January "A consensus has emerged since the death of King Abdullah of Saudi Arabia that the kingdom will not change course on oil policy''.

It is now clear that the Saudis will stick to the policy of producing around 10m barrels per day and will not curtail production soon. The Saudi Oil Minister was quoted as saying "We may not see the 100 US$ per barrel again". I don't subscribe to the view that the collapse of oil prices is a conspiracy conceived in Saudi Arabia and Washington to force Iran to make tangible concessions in relation to its nuclear enrichment programme. Neither do I accept that it is a plot to punish Moscow for its intervention in the Ukraine.

Most media reports blamed Saudi Arabia for driving down the price. Reuters reported on 14 December that "Iranian President Hassan Rouhani has blamed Saudi Arabia".

The facts are more complex. Experts are of the view that the fundamentals are pointing to an excessive supply and to weakening demand.

The real reasons for the slump in oil prices are weak demand in China due to weaker economic growth, coupled with surging US production. Oil producing countries inside OPEC such as Iran and Venezuela have lobbied the Saudis to make significant production cuts. But Saudi Arabia and the Arabian Gulf states have so far refused to contemplate any cuts. They don't want to lose market share just to please Iran and Russia.

The Wall Street Journal reported on 23rd Jan 15 "Chinese customs data released last week show that China's crude imports from Saudi Arabia fell 8% and those from Venezuela dropped 11%.

Despite the turmoil Iraq is still producing 4m barrels per day and Russia is producing 10.5 m barrels per day. Globally in total the world produced a record 92.18 million barrels of oil per day in 2014 leaving a daily surplus in excess of 1 million barrels per day. Despite that, OPEC producers continued to produce around 30m barrels per day according to a recent Time magazine report.

The combination of a shrinking Chinese demand and expanding US production has resulted in a big surplus.

American shale-oil and gas producers in North Dakota and Texas are now feeling the pinch. The need a price in the range of $60-$70 per barrel as an absolute minimum to be commercially viable. Media headlines screamed "OPEC declares war on shale oil producers". However, the Financial Times on 9 December 2014 stated rather more calmly: "rather than a war, the US shale industry is braced for a test of endurance".

A price of 50 US$ per barrel or less is catastrophic for the shale oil and offshore producers. In Saudi Arabia it costs only a few dollars to produce a barrel of oil.

The main winners are countries which import most of their energy needs from OPEC, consumers in Europe and Asia as well as the heavy industrial users such petro-chemical manufacturers. But the biggest losers are Russia, Iran, Venezuela and the heavy cost producers such as fracking and offshore companies.

Saudi Arabia is not under any obligation to cut its production to help Iran, Venezuela, Russia or the US frackers in Texas and North Dakota. It suits Saudi Arabia if the frackers and shale oil producers are driven out of business.

What the Saudis are saying is this: Why should we sacrifice our market share just to help Russia, Iran, the high cost offshore producers and the frackers?