The Last Laugh?

“I am a man of the desert; nobody is going to laugh at my beard!”

Source: Wikipedia

That’s what the Saudi oil minister exclaimed as he stormed out of an OPEC meeting some 30 years ago. The $34 oil price—equal to $100 today—had been supported by massive cuts in Saudi production. They were the “swing producer” that allowed the cartel to maintain its higher price. But OPEC was being torn apart by over-pumping, price discounting, and increased non-OPEC production. So the Saudis decided to pump all they could. The price then fell over 75%, to $8 per barrel.

Is the same thing happening now? The Saudis are worried; their share of global oil production has fallen even as global growth weakens and new sources of oil are coming online. By pumping at capacity, they can slow the growth of more expensive techniques. They can handle the budget deficits that come lower oil prices; they have nearly $750 billion in accumulated reserves.

A significant fall in oil prices would dramatically affect economies around the world, stimulating consumers and stranding marginal production. The oil industry could consolidate around cash-rich majors. Whatever the outcome, no one is laughing at the Saudis now.


Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2017-07-17T12:23:16+00:00 October 15th, 2014|Global Market Update|0 Comments

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