Why are oil prices falling?
Source: Arab News
The short answer is, because Saudi Arabia wants them to. A recent Wall Street Journal article notes that the Saudi oil minister, Ali al-Naimi, is concerned that North American shale oil producers are gaining market share at the Kingdom’s expense. Back in September oil was priced at $90 / barrel, at the low end of its recent price range. Naimi went on vacation, removing Saudi Arabia from a public debate over how OPEC should respond.
But by mid-October, as prices continued to slide, the Saudi minister met with his Venezuelan counterpart to see if they could forge some kind of agreement among OPEC and non-OPEC nations to reduce production. It didn’t work. Russia balked at trimming how much it pumped, claiming a cut could cause it to lose permanent capacity in some of its arctic fields.
So when ministers met in November, they maintained their levels, saying falling prices would be painful, but losing customers to shale would be worse. The result has been $55 / barrel for crude and $2.40 / gallon for gasoline. And US shale producers might continue to pump anyways—existing wells may be profitable even if it’s no longer cost-effective to develop new fields.
Lower energy prices will be an economic tail-wind for the developed economies of the US, Europe, and Asia. Saudi Arabia may not observe Christmas, but their production levels have given the world a nice stocking-stuffer.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!