I'm not buying that this is aimed at the shale producers for a couple of reasons. First, the cost of shale oil will come down as the expansion of production decreases. Right now, the industry is expanding as fast as it can, which had bid up the price of materials, equipment, and skilled labor. Any slowdown is going to reverse these pretty quickly, lowering the cost of shale production. This will happen faster in the shale market than in any of the national oil companies that make up OPEC.
Second, the price of oil is going to rebound at some point. Some companies involved in fracking will of course go out of business, but many more won't. As soon as oil rebounds, they will be there to continue the fracking boom.
Last, there are producers who are far more vulnerable than the bulk of the shale producers and are likely to break first. Venezuela is of course the obvious example. The country with the largest proven reserves of oil has managed to come out of a decade long oil-boom with a significant debt, huge deficits, declining production, and the highest bond rates in the world. Their bonds carry a higher risk of default than Ukraine and bankruptcy won't even help them too much as the government has valuable overseas assets (Citgo) and makes almost all of their foreign currency by sending tankers of oil to places where they can be seized by their creditors. They were asking for a 500,000 barrel per day reduction in oil, given a year, they will probably provide this themselves within a year.
My take is that the Saudis simply weren't willing to slow production to benefit their fellow OPEC members and the increasing number of non-OPEC suppliers at the cost of their own market share. This doesn't require that they target anyone in particular, they're just acting in their best interest.... although they probably have no problems seeing the Iranians and Russians suffer a bit.
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Date: 15/12/14 01:42 (UTC)Second, the price of oil is going to rebound at some point. Some companies involved in fracking will of course go out of business, but many more won't. As soon as oil rebounds, they will be there to continue the fracking boom.
Last, there are producers who are far more vulnerable than the bulk of the shale producers and are likely to break first. Venezuela is of course the obvious example. The country with the largest proven reserves of oil has managed to come out of a decade long oil-boom with a significant debt, huge deficits, declining production, and the highest bond rates in the world. Their bonds carry a higher risk of default than Ukraine and bankruptcy won't even help them too much as the government has valuable overseas assets (Citgo) and makes almost all of their foreign currency by sending tankers of oil to places where they can be seized by their creditors. They were asking for a 500,000 barrel per day reduction in oil, given a year, they will probably provide this themselves within a year.
My take is that the Saudis simply weren't willing to slow production to benefit their fellow OPEC members and the increasing number of non-OPEC suppliers at the cost of their own market share. This doesn't require that they target anyone in particular, they're just acting in their best interest.... although they probably have no problems seeing the Iranians and Russians suffer a bit.