Oil production and oil prices worldwide.
Doc Moncal writes: How long can Saudi Arabia operate their country in the red on $45.00 bbl oil before cutting production to increase their profit margins?ay With oil prices in the $40-50 range, it sounds like Saudi Arabia will be able to continue on its current course for about 3-5 years, depending on the efforts they undertake to cut expenditures and raise outside funds via debt.
The key focal point for analysts keen on assessing the financial stress in the Saudi Arabian government is measuring the country’s foreign currency reserves. From a peak of $737 billion in August 2014, they have fallen to $672 billion in May 2015, or at a rate of $12 billion per month. That rate was partially impacted by generous grants to the population by King Salman immediately upon assuming the throne, but continued low oil prices, ongoing government expenditures and the Yemen war effort are taking its toll on the country’s foreign currency reserves. Based on the monthly reserve decline rate, the government would have 47 months before reaching the 2009 low level of reserves, meaning it would happen in early 2019.
The IMF reported on breakeven oil prices and years of fiscal reserves for MENAP nations in October with similar conclusions of KSA requiring oil prices just above $100 to balance its budget and fiscal reserves of slightly over 5 years based on $50 oil:
Saudi Arabia has many options to improve its financial situation (cutting fuel subsidies, delaying large capital expenditures, reducing defense spending, austerity measures, and issuing debt, among others). Of course, all of those options carry with them risks of damage to the economy and potential civil unrest.
An economic argument to be made for KSA to curtail oil production. At 10.3 MMbopd of production at $45, the kingdom stands to generate $169 billion over 1 year. At 9 MMbopd at $60, oil revenue would climb 17% to $197 billion.
Almost certainly a reduction of over 1 MMbopd would lead to a significant ($10+) increase in oil prices, especially given the decline in US production and the still ongoing shake-up among US producers, the massive CAPEX reductions made in 2015 and set to go further in 2016, and smaller disruptions in Brazil and Libya currently ongoing.
Granted, the Saudis would give up some market share in cutting production, most likely to Iran, Russia, and other Gulf states. But the ability of those countries (or any country besides Saudi Arabia) to significantly increase production to make up for such a decline and meet increasing oil demand (expected to rise over 1MM bopd next year) is negligible. The billions of dollars of investment required are simply not forthcoming.
