Hell no, I do not want to relive 1986!
Yesterday a client said, “It feels like 1986.”  We haven’t heard that since 1986, and that year was a pivotal one.

The United Kingdom and France announced plans to construct the Channel Tunnel

The Space Shuttle Challenger disintegrated shortly after launch
Halley’s Comet made its second visit to our solar system in the 20th Century
The Soviet Union’s General Secretary Mikhail Gorbachev announced his Glasnost and Perestroika policies
Ferdinand Marcos went to exile, which ended 20 years of auth...

360 Commentary

A Royal Pain

If OPEC, and Saudi Arabia in particular, is waging a price war against independent shale oil producers in the U.S., there may be a practical limit to the kingdom’s desire to squeeze American operators. As reported in Oil & Gas 360® Meghan O’Sullivan, a professor of international affairs at Harvard’s Kennedy School said this to BloombergView about Saudi Arabia’s willingness to let prices free fall, “Even if the nation can weather the economic fallout, falling prices could translate into a perception among the Saudi people that the monarchy has lost control of the oil market, and inject greater instability into an already uncertain domestic political environment.”

O’Sullivan emphasized the painful lesson the Saudis learned from the oil embargoes and shocks of the 1970s. High prices encouraged a wave of international exploration, which resulted in large oil finds in the North Sea, Gulf of Mexico and other regions. The short term gain in cash flow and international prestige was offset by the loss of long-term market share. The fact that America is now a larger oil producer than Saudi Arabia may be viewed somewhat as an embarrassment, but the kingdom can ill afford more loss of market share and a domestic budget stressed by low prices.

Saudi Oil Minister Ali al-Naimi added to the rhetorical war of words during an interview with CNBC on December 10, 2014 at a climate change conference in Lima, Peru. When asked if he thought it would be necessary for Saudi Arabia to cut oil production to support prices, al-Naimi told the network, “Why should we cut production? Why?"

At the same conference and as reported by Bloomberg, Venezuelan foreign minister and top OPEC emissary Rafael Ramirez, emphasized OPEC should act because, "that is our job. We want stability in the market and predictability." Ramirez continued, “The drop in oil prices is not good for anyone,” and conveyed that his country sees $100 per barrel as “fair.”

The differences in what constitutes a “good” or “fair” oil price depends on large part on the breakeven price to fund government expenditures. Venezuela, as noted earlier, requires an oil price of $121 per barrel to pay for its domestic budget, far higher than the $93 target for the Saudis. The longer the price slump continues, the divisions in OPEC are likely to grow deeper and wider.  

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