Foreign Affairs

Saudi Arabia’s Attempts To Kill American Oil Only Made It Stronger

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Saudi Arabia’s plan to keep oil prices so low U.S. companies can’t compete is backfiring. In fact, the Saudi scheme has only made America’s shale oil industry stronger.

“It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought,” the Saudi central bank commented in a recent stability report. Bank of America says OPEC is now “effectively dissolved,” as members like Iraq and Kuwait undercut Saudi Arabia, causing the organization to fall into a what is effectively a civil war.

A year ago, Saudi Arabia made a huge bet against the United States. The Saudis hoped that flooding the market with cheap oil would drive down prices low enough to squeeze out their rivals. This included a band of American upstarts who were tapping into unconventional oil, which, on paper, seemed like they would only remain profitable when oil prices were high. But since then, American oil production has only increased, as has the production of Saudi Arabia and Russia, which means that cheap oil is here for the foreseeable future. 

Saudi oil export revenues dropped 46 percent in just the last year and the country is selling bonds for the first time since 2007. As oil accounts for 90 percent of the Saudi government’s revenue, it is now expecting a budget deficit of $140 billion— roughly 20 percent of Saudi GDP. When compared to 2013’s surplus of $48 billion, the fiscal outlook for the kingdom looks so dim that the International Monetary Fund (IMF) warned the Saudis that they could go through their fiscal reserves within five years.

American unconventional shale oil is simply more flexible because American firms are smaller, and thus more responsive to changing conditions. In the United States, lead times between investment decisions and production are measured in weeks, in Saudi Arabia, they’re measure in years. Innovative technologies like smart drill bits, dissolvable drilling plugs, and horizontal drilling are rapidly cutting costs for American firms. If oil prices rise again, American firms will be well positioned to rapidly increase production again.

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