My crystal ball is working overtime trying to figure out what the future of oil prices will look like. You’ve already heard one of the scenarios, but here’s another POTENTIAL way this could play out.
The Saudis could get frustrated with other oil producers not cutting production, and flood the market with oil. We’re talking 3 million barrels per day, which would drive prices down below $50 per barrel. This would have an outsized impact on higher cost producers like Angola, Venezuela, and Nigeria.
These countries could face economic instability because of this, but they’re not getting the worst of it. The Russian oil fields are hard and expensive to operate, should production drop during a price war, it may never recover. Oh, and the US will be fine thanks to low-cost shale production.
Okay, I’ll go get the popcorn and you grab the sodas.
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Hey everybody. Peter Zeihan here. Coming to you from Fort Worth, Texas. And, I spoke with you recently about what I consider to be the highest risk we’ve had in a long time to the Middle East for crude oil supplies. But remember that I pointed out the possibility of Iran striking at Saudi Arabia’s energy complex and Israel taking out Iran’s, for that matter.
I said 1 in 4 to 1 in 3 chance. It’s not that I think it’s a majority chance. In fact, you know, there’s obviously other scenarios. I’m going to share another one with you today, which takes us the absolute opposite direction and probably has about the same chance of happening just to confuse anyone who wants to play some money in the market.
So you know, you have fun with this. So the idea is that Saudi Arabia is getting a little cheesed off that it has been restricting its own production in an attempt to boost oil prices. Specific. While my hair is out of control here, in order to get prices up, above $100 a barrel. And with the exception of the United Arab Emirates, no one else in OPEC, much less this broader OPEC+ group, has been cutting production at all.
In fact, everyone else has been putting as many barrels in the market as they possibly can. And of course, the U.S. shale producers continue to produce. That’s something that by any other standards would be record levels. But by their standards, like, oh no, only went up a million barrels a day this year, which, you know, is bonkers that it is now and done that for eight of the last 15.
Anyway, the Saudis have very clearly gotten annoyed, and they’re indicating that they’re willing to put a lot more oil on the market, maybe as many as 3 million barrels a day, and that they’re going to try to drive prices down quite a bit in order to grab market share. And that the number of $50 a barrel or lower has been floated. Doing something like that is well within the Saudis’ capability, assuming that global politics are favorable, which is always a little touch and go anyway. Whenever the Saudis have done this, it causes a lot of ruckus around the world among all of the other oil producers, specifically those that
have higher breakeven costs. So places like Angola or Venezuela or Ecuador or Nigeria and especially in places that are really, really dependent on oil flows, like places like, say, Libya and Nigeria in that category, because if they’re getting a lot less income, you know, obviously they face social malcontent. And if their crude isn’t profitable at that point, then they have to shut those production levels in.
And sometimes it can take years, if not decades, for that to be rebuilt. One country I’m not worried about is the United States. We’re now in a situation where the vast, vast, vast—over 80%—majority of the oil that the U.S. produces comes out of a shale well, and pretty much everybody is profitable below 50.
In fact, you’d have to go down to below, probably 35, before you’d see a meaningful impact on existing production. Keep in mind that once you’ve drilled your shale well, its production costs for operating purposes drop below about $10-15 a barrel in most places. So you might not drill new wells, but you’re going to maintain what you’ve got.
In fact, it costs money to shut it in anyhow. The last three times that the Saudis have done something like this, we’ve seen a little blip, oftentimes, in American shale output. But then you see it surge back very quickly, because from the time that a shale operator starts working on a well to the time that it actually starts producing is usually only about two months or less. With some of the new technologies, that might be a little longer, but it’s still less than three months anyway.
So whenever you’ve got market share up for grabs, the Saudis, of course, try to take it, but the U.S. shale guys do as well. So the Saudis have to do all the work, and they don’t have to split the benefits with the U.S. shale players. Now, this time, there is one other thing in the mix that is going to make this particular potential price war a little bit more exciting.
And that is Russia. Russia’s fields are deep. They are thousands of miles from international markets. They require over a thousand miles of pipes. Even the ones that are close to international markets, most of them are in the permafrost. And the Russian educational system for generating petroleum engineers collapsed back in the 1980s. So the only people in Russia who are capable of doing the work are a small cadre of Russian citizens who, in the 2000s, were basically trained abroad.
There’s just a few dozen people, because of the Ukraine war, because of the sanctions regime. The people who would normally do this work, typically Americans, Brits, Dutch, and Germans, are all out, and the Chinese don’t have the capability to work in this sort of technically demanding environment. They just haven’t learned those skills yet. So if you have high-price producers like Russia who lose production, this time around, they’re actually out of the market for good.
A lot of the fields aren’t simply old and complicated and far away and deep; they’re also very, very mature. So it would take a huge amount of investment and technology the Russians simply don’t have in order to get it back up and running on the backside of any sort of trade war. And they can’t do that themselves.
So, how is that for two bookends for what can possibly happen? A conflict in the Persian Gulf that sends oil prices skyrocketing, or a price war that removes a major player from the market permanently? Both of these could happen. In fact, it’s entirely possible that we’re getting some mix of the two, where the Saudis start with the price war, and then the Iranians have an economic reason to take out Saudi energy prices.
And if this is just too wishy-washy for you, well, welcome to my world. This is what geopolitics often is.
