Oil in Global Economy Series: Saudi Arabia’s effort to push out high cost shale oil from market would fail

The oil production has been rising in Saudi Arabia throughout this year and according to the latest data Saudi Arabia is producing 10.65 million barrels of oil per day, overtaking the United States as the largest oil producer globally. Since the oil price crash, which began in the summer of 2014, Saudi Arabia has repeatedly shrugged off ideas of production cuts to support the oil market. The strategy has been to push out the high-cost producers from the market that includes shale oil in the United States.

However, our analysis of the figures from Pioneer Natural Resources that is a large corporation producing Petroleum, LNG and natural gas based in Texas, suggests that the strategy of Saudi Arabia to push high-cost producers such as shale oil is likely to fail. And that is because one simple fact that the shale oil producers are not the high cost producers anymore.

The figure shows that the cost of producing a barrel of oil equivalent ranges from $2.25 per barrel to $12.5 per barrel. With such low costs, there are no ways the Saudis can stop the shale revolution not only in America but spreading elsewhere.

However, there are challenges for the shale producers and those are other expenses and debt. The biggest cost factors are drilling and abandonment (the cost however, has declined by 35 percent since 2014), general administration, depreciation ($17-19 per barrel), interest expense (3 times the cost of drilling and abandoning). Due to the last factor, high debt and interest expenses, many shale oil companies have gone bust in recent times but when large companies such as Exxon Mobil acquires those assets the costs are likely to come down further and the debt would be less of an issue and Shale oil to the disappointment of Saudi Arabia would continue to prevail.